<PAGE>
[LOGO]
4,600,000 Shares
NBC INTERNET, INC.
Class A Common Stock
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This is a public offering of 4,600,000 shares of Class A common stock of NBC
Internet, Inc. NBC Internet is selling 3,650,000 shares of Class A common stock
and the selling stockholders identified in this prospectus are selling
950,000 shares of Class A Common Stock. NBC Internet will not receive any of the
proceeds from the shares of Class A common stock sold by the selling
stockholders.
NBC Internet's Class A common stock is traded on the Nasdaq National Market
and on the European Association of Securities Dealers Automated Quotation System
under the symbol "NBCI." On February 3, 2000, the last reported sale price for
the common stock was $81.375 per share.
Concurrent with this offering, a stockholder named in this prospectus is
offering up to 1,250,000 shares of Class A common stock (or up to 1,437,500
shares if the underwriters' over-allotment option is exercised in full) that may
be delivered by the NBCi Automatic Common Exchange Security Trust (the "TRACES
Trust") upon exchange of $5.90 Trust Automatic Common Exchange Securities on the
Exchange Date as defined in the TRACES Trust prospectus. The Automatic Common
Exchange Securities are being sold by the TRACES Trust in an offering described
in the Trust prospectus. The respective closings of the offerings of the Class A
common stock and the Automatic Common Exchange Securities are not dependent upon
one another.
SEE "RISK FACTORS" BEGINNING ON PAGE 11 TO READ ABOUT FACTORS YOU SHOULD
CONSIDER BEFORE BUYING SHARES OF THE CLASS A COMMON STOCK.
------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<TABLE>
<CAPTION>
Per Share Total
----------- -------------
<S> <C> <C>
Public offering price........................................................................ $ 81.375 $ 374,325,000
Underwriting discount........................................................................ $ 4.232 $ 19,467,200
Proceeds, before expenses, to NBC Internet................................................... $ 77.143 $ 281,571,950
Proceeds, before expenses, to the selling stockholders....................................... $ 77.143 $ 73,285,850
</TABLE>
The underwriters may, under certain circumstances, purchase up to an
additional 690,000 shares from NBC Internet and one of the selling stockholders
at the public offering price, less the underwriting discount.
------------------
The underwriters expect to deliver the shares against payment in New York,
New York on February 9, 2000.
GOLDMAN, SACHS & CO. BEAR, STEARNS & CO. INC.
----------------
CHASE H & Q
DEUTSCHE BANC ALEX. BROWN
ROBERTSON STEPHENS
------------------
ALLEN & COMPANY INCORPORATED
BANC OF AMERICA SECURITIES LLC
GRUNTAL & CO., L.L.C.
SALOMON SMITH BARNEY
------------------
Prospectus dated February 3, 2000
<PAGE>
[inside front cover]
Graphic with NBCi logo in the center of a circular display of the logos of
NBCi's Internet properties, which include Snap, SnapTV, VideoSeeker, NBC-IN.com,
Xoom.com and NBC.com.
<PAGE>
[GATEFOLD]
Graphic depicting NBCi logo; below the NBCi logo the text "Viewers" between
the NBCi logo and "Viewers" is the text "NBC TV Broadcast Network" below this
text "91 million households/ month in 1999"; to the right, the text "Visitors"
below this text "Information Services: directory, global resources and
information, local and personalized content, personal finance"; to the right,
the text "Members" above text "Utility Services: free e-mail, search engine, web
development tools, digital user storage and software" below "Members" the text
"Entertainment Services: rich media and broadband services, user-generated
content, chat rooms, online greeting cards"; to the right the text "Buyers",
below this text "e-Commerce Services: auctions, price comparison shopping
engine, database marketing, shopping directory, digital wallet, business portal
and business directory".
The logos of NBCi's Internet properties are displayed along the bottom of
the page from left to right: Snap, Xoom.com, VideoSeeker, NBC.com, NBC-IN.com
and Snap TV.
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. THIS SUMMARY MAY NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD
CONSIDER BEFORE INVESTING IN THE COMMON STOCK. YOU SHOULD READ THE ENTIRE
PROSPECTUS CAREFULLY, INCLUDING "RISK FACTORS" AND OUR PRO FORMA FINANCIAL
INFORMATION AND THE FINANCIAL STATEMENTS OF XOOM.COM, INC., SNAP! LLC AND NBC
MULTIMEDIA DIVISION BEFORE MAKING AN INVESTMENT DECISION. EXCEPT AS OTHERWISE
REQUIRED BY THE CONTEXT, REFERENCES IN THIS PROSPECTUS TO "WE", "US", "OUR" OR
"NBCI" REFER TO NBC INTERNET, INC. AND ITS SUBSIDIARIES. THE TERM "YOU" REFERS
TO PROSPECTIVE INVESTORS IN OUR CLASS A COMMON STOCK. THE TERM "NBC" REFERS TO
NATIONAL BROADCASTING COMPANY, INC.
OUR BUSINESS
NBCI OVERVIEW
NBCi is an integrated Internet media company that combines portal, community
and e-commerce services designed to deliver a comprehensive, next-generation
online experience to a global audience. Our online properties ranked in the top
ten of the most visited sites on the Internet in December 1999 with over 14.9
million unique visitors and an aggregate Internet reach among home and work
users of 22.9%, according to Media Metrix reports. We deliver enhanced branded
services and content with a growing emphasis on services that take advantage of
Internet ubiquity and broadband access. NBCi integrates fast-growing and premier
assets such as Snap.com, Xoom.com, NBC.com, VideoSeeker.com and NBC-IN.com and
content from AccessHollywood.com. We combine the NBC media brand and related
content with the complementary portal and navigation services of Snap.com and
community and direct e-commerce services of Xoom.com to deliver a comprehensive,
entertaining and compelling Internet experience to a broad audience. We believe
our core services will provide the foundation for a next-generation media
company whose e-commerce and community orientation will reach a diverse user
base through a variety of interactive media including broadcast and cable
television, radio and the Internet.
We believe that our services create an environment that attracts users and
encourages both longer and repeat visits as well as customer loyalty, resulting
in a large base of registered members. These services are focused on generating
both advertising and e-commerce revenue by allowing advertisers and merchants to
reach a broad and segmented audience of Internet users. Our portfolio of
content, community and e-commerce services include:
- ENTERTAINMENT SERVICES: free rich media and broadband content,
user-generated content, chat rooms and online greeting cards
- INFORMATION SERVICES: free directory, global resources and information,
local and personalized content and personal finance information
- UTILITY SERVICES: e-mail, search engine, Web development tools, home
pages, digital user storage and software libraries
- E-COMMERCE SERVICES: business-to-consumer services and
business-to-business tools such as auctions, price comparison shopping
engine, database marketing, shopping directory, digital wallet, business
portal and business directory
We believe our ability to aggregate information about our consumers'
interests across these online services, in combination with our ability to
coordinate network advertising with NBC, will provide cross-selling and
promotional opportunities that distinguish us from most of our competitors in
the Internet industry. In addition, we have the ability to target customers with
advertising and e-commerce opportunities using demographic data and information
on buying habits, services used and lifestyle interests. This information is
collected on a permission basis and we use it to assist
3
<PAGE>
advertisers in focusing and monitoring the effectiveness of their presentations,
as well as to offer relevant e-commerce opportunities. We facilitate these
transactions through our direct e-commerce platform and proprietary database
management system.
The total number of registered users on our various properties was over
16 million as of December 31, 1999, with new members registering at the rate of
33,000 per day during December 1999. In December 1999, our Internet properties
had over 783 million collective page views. From these users we have generated
$45.3 million and $10.4 million in pro forma revenues from advertising and
e-commerce, respectively, in the nine months ended September 30, 1999.
OUR MARKET OPPORTUNITY
The Internet has emerged as a global medium, enabling millions of people
worldwide to share information, communicate and conduct business electronically.
The proliferation of Internet users, combined with the Web's reach and lower
cost of marketing, has created a powerful channel for conducting commerce,
marketing and advertising. The ability to compete effectively in the current
environment will require Internet companies to offer high quality products and
multimedia content, to maintain a sufficiently high level of service to attract
a strong and diverse user base, to access capital and to establish partnerships
with companies offering complementary services.
The growing adoption of the Web has created an important new advertising
channel and represents a significant opportunity for businesses to conduct
commerce over the Internet. Online community sites provide more detailed
demographic data on self-selected groups of consumers with an affinity for
particular products, services and lifestyles. As a result, advertisers can more
easily deliver targeted messages in a cost-effective manner. The Internet also
allows companies to develop one-to-one relationships with customers worldwide
without making significant investments in traditional infrastructure such as
retail outlets, distribution networks and sales personnel. Increased consumer
acceptance of online shopping and targeted product offerings is expected to be a
significant factor in the growth of e-commerce.
The development of higher speed access to the home and the proliferation of
Internet devices other than the PC are beginning to result in significant
changes in the dynamics of Internet usage. The Internet is increasingly being
used as a means to distribute video, audio and other high-data rate content, as
well as distributed applications. Additionally, devices such as Internet-enabled
wireless phones and personal digital assistants are enabling users to access
Internet content and services outside the home and office. As a result,
consumers will access the Internet with greater frequency and duration, building
a more valuable and loyal interaction between Internet services and users.
OUR STRATEGY
By providing a broad array of professionally created and user-generated
content in a single service, we intend to develop the leading integrated media
properties on the Internet. We will continually upgrade and expand NBCi's
portfolio of services to create a more entertaining and dynamic online
experience. We believe this will enable us to grow our registered user base and
increase the level of Internet traffic on the NBCi properties. We also intend to
capture relevant data on our users to enhance our proprietary database of user
demographics and to provide them with more personalized services. A key element
of our business strategy is the development and introduction of new services
designed for specific user groups with particular demographic characteristics
and geographic concentration. We plan to accomplish these goals through the
following strategies:
- Build and enhance our core brands
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- Increase content and service offerings to grow our user base
- Create a valuable advertising and e-commerce franchise
- Aggregate users around selected vertical content areas
- Lead next-generation broadband and wireless initiatives
- Build our business-to-business offerings
- Accelerate pursuit of international opportunities
- Continue to develop or acquire leading-edge targeting technology and
software
Under our brand integration and license agreement with NBC, we are the
exclusive vehicle for NBC to operate a general portal service, a broad-based
community service and a direct broad-based e-commerce service. The NBC
relationship will offer us opportunities to access content and extend NBCi's
brand awareness in defining the next-generation Internet user experience. We
believe our brands will be ideally suited for this accessible, immersive, rich
media environment and will enable a high value relationship with our users and a
dynamic selling environment for our business partners. We intend to leverage
NBC's extensive advertising relationships to create unique ways for advertisers
to reach consumers by capitalizing on synergies between on-air and online media.
We have also entered into a multi-year television network advertising agreement
with NBC enabling us to market the integrated NBCi services to viewers of the
NBC television network, which attracted the highest percentage of Internet users
among all major networks during the February 1999 sweeps period according to
Nielsen Media Research. This relationship combined with our attractive offering
of free services and content, as well as our large and diverse range of active
communities, will encourage users of our Web sites to become members. Finally,
with our proprietary consumer database of purchasing information, we intend to
offer advertisers and e-commerce partners the ability to deliver highly targeted
messages and product offerings to our members.
We plan to grow our e-commerce activities through investments, strategic
partnerships and complementary acquisitions. We will continue to build our
business-to-consumer e-commerce platform by aggregating buyers, creating
innovative and targeted promotional opportunities for high quality products and
services, and enhancing the user experience to encourage completion of online
transactions. Similarly, we will develop our business-to-business e-commerce
platform by leveraging our auction, business portal, business directory and
database services.
"NBCi", "Snap" and "Xoom.com" are some of our trademarks. This prospectus
also contains other product names, trade names and trademarks of other
organizations that belong to such organizations.
RECENT EVENTS
On November 29, 1999 and November 30, 1999, respectively, the transactions
contemplated by the agreement and plan of contribution and merger dated May 9,
1999 as amended on October 20, 1999, among us, CNET, Inc., Xoom.com, Xenon 3,
Inc. and Snap! LLC and by the second amended and restated agreement and plan of
contribution, investment and merger dated July 8, 1999, as amended on October
20, 1999, among us, NBC, GE Investments Subsidiary, Inc., Neon Media
Corporation, and Xoom.com, were consummated. As a result of these transactions,
Xoom.com and Snap became our wholly owned subsidiaries and we became the owners
of the businesses related to NBC.com, NBC-IN.com and VideoSeeker.com and of a
10% ownership interest in CNBC.com LLC.
5
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RECENT OPERATING RESULTS
On January 27, 2000, we announced our unaudited results of operations for
the year ended December 31, 1999. Under generally accepted accounting
principles, our financial results are reported treating Xoom.com as the
accounting acquiror in the purchase business combination that resulted in the
formation of our company. Under this accounting treatment, the financial results
of Snap and the NBC Multimedia Division (which consists of NBC.com, NBC-IN.com,
and VideoSeeker.com) are excluded prior to November 30, 1999. On this basis, our
unaudited revenues were approximately $35.6 million for the year ended
December 31, 1999, which compares to revenues of approximately $8.3 million for
the year ended December 31, 1998. Our net loss was approximately $86.8 million
and our net loss per basic and diluted share was $4.26 for the year ended
December 31, 1999, which compares to a net loss of approximately $10.8 million
and a net loss per basic and diluted share of $1.37 for the year ended
December 31, 1998.
On a pro forma combined basis, as defined by SEC rules and regulations, our
statement of operations as described above is combined with the historical
statements of operations of (i) Snap! LLC; (ii) the businesses related to
NBC.com, NBC-IN.com, and VideoSeeker.com; (iii) MightyMail Networks, Inc.;
(iv) Paralogic Software Corporation; and (v) LiquidMarket, Inc. for the year
ended December 31, 1999, giving effect to these acquisitions, including the
amortization of goodwill and intangible assets, as if they had occurred on
January 1, 1999. On this basis, our pro forma revenues were approximately
$101.5 million, our pro forma net loss was approximately $397.0 million, and our
pro forma net loss per basic and diluted share was $8.17 for the year ended
December 31, 1999.
These financial results are preliminary, are subject to the completion of an
audit of our December 31, 1999 financial statements, and are not necessarily
indicative of the results to be expected for future periods.
OUR OFFICES
We were incorporated in Delaware on May 7, 1999 under the name Xenon
2, Inc. and changed our name to NBC Internet, Inc. on July 8, 1999. Our
headquarters are located at 225 Bush Street, San Francisco and our telephone
number is (415) 375-5000. Our Web site is WWW.NBCI.COM. This reference to our
Web site does not constitute incorporation by reference of the information
contained at our site.
CONCURRENT OFFERING
Concurrent with this offering, the NBCi Internet Automatic Common Exchange
Security Trust, or the TRACES Trust, a stockholder named in this prospectus is
offering up to 1,250,000 shares of Class A common stock (or up to 1,437,500
shares if the underwriters' over-allotment option in the Traces offering is
exercised in full) that may be delivered by the TRACES Trust upon exchange of
such securities on the Exchange Date as defined in the TRACES Trust prospectus.
The Automatic Common Exchange Securities are being sold by the TRACES Trust in
an offering described in the Trust prospectus. The respective closings of the
offerings of the Class A common stock and the Automatic Common Exchange
Securities are not dependent upon one another.
------------------------
THIS PROSPECTUS INCLUDES STATISTICAL DATA ABOUT THE INTERNET INDUSTRY THAT
COMES FROM INFORMATION PUBLISHED BY SOURCES INCLUDING MEDIA METRIX, INC., A
MEDIA RESEARCH FIRM SPECIALIZING IN MARKET AND TECHNOLOGY MEASUREMENT ON THE
INTERNET. WE ALSO REFER TO NIELSEN MEDIA RESEARCH, JUPITER COMMUNICATIONS, LLC,
A MEDIA RESEARCH FIRM FOCUSING ON THE INTERNET INDUSTRY, AND INTERNATIONAL DATA
CORPORATION, ALSO KNOWN AS IDC, AND FORRESTER RESEARCH, PROVIDERS OF MARKET
INFORMATION AND STRATEGIC INFORMATION FOR THE INFORMATION TECHNOLOGY INDUSTRY.
ALTHOUGH WE BELIEVE THAT DATA FROM THESE COMPANIES IS GENERALLY RELIABLE, THIS
TYPE OF DATA IS INHERENTLY IMPRECISE. WE CAUTION YOU NOT TO PLACE UNDUE RELIANCE
ON THIS DATA.
6
<PAGE>
THE OFFERING
The following information assumes that the underwriters do not exercise the
option to purchase additional shares in the offering. See "Underwriting."
<TABLE>
<S> <C>
Class A common stock offered by NBC
Internet................................... 3,650,000 shares
Class A common stock offered by selling
shareholders............................... 950,000 shares
Common stock to be outstanding after the
offering:
Class A common stock....................... 30,396,708 shares
Class B common stock....................... 24,550,708 shares
Total.................................. 54,947,416 shares
Use of proceeds.............................. For general corporate purposes, including
developing new e-commerce channels, expanding
our operations internationally, enhancing the
value of our brands, potential acquisitions
and minority investments and working capital.
Listing...................................... The Class A common stock is quoted on The
Nasdaq National Market.
Nasdaq National Market Symbol................ NBCI
</TABLE>
In addition to the offering described in this prospectus, the TRACES Trust
stockholder named in this prospectus is offering up to 1,250,000 shares of the
Class A common stock (or up to 1,437,500 shares if the underwriters'
over-allotment option is exercised in full) that may in certain circumstances be
delivered by the TRACES Trust to holders of its Automatic Common Exchange
Securities upon exchange of those securities on the exchange date.
------------------------
The number of shares of Class A common stock to be outstanding after this
offering is based on the pro forma number of shares outstanding as of
September 30, 1999 and does not include the following:
- 6,548,329 shares of Class A common stock issuable upon exercise of options
outstanding at September 30, 1999 at a weighted average exercise price of
$21.53 per share;
- 3,155,002 shares of Class A common stock issuable upon exercise of options
outstanding subsequent to September 30, 1999 at a weighted average
exercise price of $61.38 per share;
- 924,526 shares issued upon exercise of stock options and 4,311 shares
issued to directors, employees and consultants subsequent to
September 30, 1999;
- 4,437,038 shares of Class A common stock reserved for future issuance
subsequent to September 30, 1999 under our 1999 stock incentive plan and
our 1999 employee stock purchase plan;
- 5,809,388 shares of Class B common stock issuable upon conversion of two
subordinated zero coupon convertible notes subsequent to September 30,
1999 held by affiliates of NBC;
- 244,004 shares of Class A common stock issuable upon the exercise of a
warrant held by ValueVision International, Inc. at an exercise price of
$40.893 per share;
- 24,550,708 shares of Class B common stock convertible into 24,550,708
shares of Class A common stock subsequent to September 30, 1999 at the
discretion of NBC and its affiliates; or
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- Class A common stock issuable upon the closing of potential acquisitions
valued at approximately $234 million, which if consummated at the offering
price of $81.375 per share, would result in the issuance of approximately
2,875,576 additional shares. There is no guarantee that these acquisitions
will occur and the actual number of shares issuable, if any, will not be
determined until the closing of such acquisitions.
Please see "Capitalization" for a more complete description regarding the
outstanding shares of our Class A common stock and options to purchase our
Class A common stock and other related matters.
UNLESS OTHERWISE NOTED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS WILL NOT EXERCISE THEIR OPTION TO PURCHASE ADDITIONAL SHARES OF
CLASS A COMMON STOCK TO COVER OVER-ALLOTMENTS, IF ANY.
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SUMMARY SELECTED PRO FORMA FINANCIAL INFORMATION
SELECTED UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL DATA
The following selected unaudited pro forma condensed combined financial data
of Xoom.com, Snap and the NBC Multimedia Division, which previously owned the
Internet assets contributed by NBC, are derived from the unaudited pro forma
condensed combined financial information, which gives effect to the purchase of
the businesses related to the NBC Multimedia Division and to NBCi's acquisition
of CNET's and NBC's ownership interests in Snap, with Xoom.com treated as the
accounting acquiror, and should be read in conjunction with the unaudited pro
forma condensed combined financial information and related notes, which begin on
page F-1 of this prospectus.
The unaudited pro forma condensed combined statement of operations data
assumes that the transactions occurred on the first day of each of the periods
presented. The unaudited pro forma condensed combined balance sheet data assumes
that the transactions took place as of September 30, 1999 and combines the
historical balance sheets of Xoom.com, Snap and the NBC Multimedia Division and
other purchase adjustments at that date.
The final purchase price allocation was calculated based on the values as
represented on the balance sheets of NBC Multimedia Division and Snap, as of
November 30, 1999, the date the transactions were completed.
The unaudited pro forma condensed combined information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the transaction had
been consummated at the dates indicated, nor is it necessarily indicative of
future operating results or financial condition of NBCi.
The pro forma as adjusted balance sheet data has been adjusted to reflect
the sale by us of 3,650,000 shares of Class A common stock in this offering at a
public offering price of $81.375 per share, after deducting the underwriting
discount and estimated offering expenses. See "Use of Proceeds."
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NBC INTERNET, INC. SELECTED PRO FORMA HISTORICAL FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, --------------------------
1998 1998 1999
-------------- ------------ ------------
<S> <C> <C> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS DATA:
Net revenue........................................................... $ 28,132 $ 15,912 $ 55,684
Loss from operations.................................................. $ (322,205) $ (232,423) $ (281,455)
Net loss.............................................................. $ (321,932) $ (230,576) $ (274,654)
Net loss per share--basic and diluted(1).............................. $ (7.74) $ (5.64) $ (5.77)
Number of shares used in per share calculation--basic and
diluted(1).......................................................... 41,595 40,888 47,616
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
----------------------------
PRO FORMA AS
PRO FORMA ADJUSTED
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<S> <C> <C>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments................................... $ 156,167 $ 436,239
Notes receivable from NBC and its affiliates, current and non-current ($78,288
current).......................................................................... 340,000 340,000
Working capital..................................................................... 198,773 478,845
Total assets........................................................................ 2,464,258 2,744,330
Long-term obligations, less current portion and amounts due to related parties...... 2,836 2,836
Convertible notes payable due to NBC and its affiliates, current and non-current
($101 current).................................................................... 370,101 370,101
Amounts due to CNET, current........................................................ 1,788 1,788
Total stockholders' equity.......................................................... 2,038,108 2,318,180
</TABLE>
(1) See note (K) of NBC Internet, Inc. notes to the selected unaudited pro forma
condensed combined financial information for an explanation of the
determination of the number of shares used to compute basic and diluted net
loss per share.
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RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION IN THIS PROSPECTUS,
INCLUDING OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES, BEFORE
YOU PURCHASE ANY SHARES OF OUR CLASS A COMMON STOCK. ADDITIONAL RISKS AND
UNCERTAINTIES, INCLUDING THOSE GENERALLY AFFECTING THE MARKET IN WHICH WE
OPERATE OR THAT WE CURRENTLY DEEM IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS.
BUSINESS RISKS
OUR FAILURE TO SUCCESSFULLY INTEGRATE THE OPERATIONS OF XOOM.COM, SNAP AND THE
INTERNET BUSINESSES CONTRIBUTED BY NBC COULD SERIOUSLY HARM OUR OPERATIONS
Our success will depend substantially on whether Xoom.com, Snap and the
Internet businesses contributed by NBC can be integrated by us in an efficient
and effective manner. We can provide no assurance that this will occur. The
combination of our online properties will require, among other things, the
technological integration of the Xoom.com, Snap.com, NBC.com, NBC-IN.com and
VideoSeeker.com Web sites and the coordination of the sales, marketing and
research and development efforts of Xoom.com, Snap and the Internet businesses
contributed by NBC.
Some of the factors contributing to the risks attendant to integration are:
- difficulties and expenses of integrating operations, technology and
personnel into our operations while preserving the goodwill of our
businesses;
- the additional financial resources that may be needed to fund our
operations;
- the potential disruption caused to the businesses of Xoom.com, Snap and
the Internet businesses contributed by NBC by the need to dedicate
management and other resources to completing the transactions;
- our ability to retain employees; and
- the difficulty of creating and maintaining uniform standards, controls,
procedures and policies.
We cannot assure you that we will be able to integrate our businesses
smoothly or successfully. The integration of operations will continue to require
significant management resources, which may distract attention from our
day-to-day operations.
WE WILL RECORD EXPENSES RELATED TO OUR MERGER THAT WILL HAVE A NEGATIVE IMPACT
ON OUR FINANCIAL CONDITION IN THE QUARTER ENDED DECEMBER 31, 1999 AND IN
FUTURE PERIODS
On November 30, 1999, we completed a transaction accounted for using the
purchase method of accounting whereby the operations of Snap, Xoom.com and
Internet businesses contributed by NBC were merged into our operations. As a
result of the transaction, in the quarter ended December 31, 1999, we will
record an aggregate of approximately $1.7 billion in intangible assets which
will be amortized on a straight-line basis over periods ranging from three to
seven years. In addition, in the quarter ended December 31, 1999, we will record
non-recurring restructuring charges of approximately $17.8 million. These
expenses will have a negative impact on our financial condition and results of
operations for the quarter ended December 31, 1999 and in the case of the
amortization of intangibles, in future periods.
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WE CANNOT ASSURE YOU THAT WE WILL BE PROFITABLE BECAUSE WE HAVE A LIMITED
OPERATING HISTORY AND OUR BUSINESSES ALSO HAVE LIMITED OPERATING HISTORIES AND
A HISTORY OF LOSSES
We and the businesses that were combined to form us have a limited operating
history. We were launched in November 1999, Xoom.com was founded in April 1996,
the Snap.com Web site was launched in September 1997, and NBC.com, NBC-IN.com
and VideoSeeker.com began operations in August 1995, October 1997 and May 1998,
respectively. NBC launched CNBC.com in June 1999. In addition, Xoom.com, Snap
and the Internet businesses contributed by NBC have not achieved positive annual
operating cashflows and we expect to incur net losses for the foreseeable
future.
Because of the limited operating histories of our businesses and the
uncertain nature of the rapidly changing markets we serve, future results of
operations cannot be predicted. Moreover, it is difficult for us to plan or
anticipate our revenue potential and operating expenses based on the limited
historical financial data of our businesses.
We currently expect that our operating expenses will continue to increase
significantly as we expand our sales and marketing operations, continue to
build, develop and extend our online brands, fund greater levels of product
development, develop and commercialize additional media properties, and acquire
complementary businesses and technologies. Accordingly, we will need to increase
revenues to be profitable. As a result, we may experience significant losses on
a quarterly and annual basis. If our actual revenue is lower than predicted, we
may be unable to adjust our operating expenses accordingly. If revenues do not
grow as expected or increases in expenses are not in line with forecasts, our
business, results of operations and financial condition could be seriously
harmed. If our operating results in any period fall below the expectations of
securities analysts and investors, the market price of our shares would likely
decline.
OUR BUSINESSES WILL BE SUBJECT TO ALL OF THE RISKS AND DIFFICULTIES FREQUENTLY
ENCOUNTERED BY EARLY STAGE COMPANIES
The prospects of our businesses are subject to all of the risks and
difficulties frequently encountered by early stage companies in new and rapidly
evolving markets, particularly those involved in the Internet and in e-commerce.
These risks include the following uncertainties and potential adverse
developments:
- the uncertainty of the level of use of the Internet and online services
and the acceptance of the Internet and other online services and products
such as those we offer;
- the lack of success of our proposed business model on the Internet;
- our failure to continue to build, develop and extend our online brands;
- our inability to obtain needed financing;
- higher than anticipated marketing costs that we will need to incur to
build, maintain and enhance our online brands;
- our inability to generate significant advertising, e-commerce or premium
service revenue;
- our inability to maintain and increase levels of traffic and membership on
our Web sites or to manage rapidly expanding operations effectively;
- the emergence of new services offered by our competitors that affect the
level of traffic on our Web sites and our ability to expand our membership
base;
- our inability to predict demand for products and services we offer and to
optimize advertising inventory levels accordingly;
- our inability to meet minimum guaranteed impressions under advertising
agreements;
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- our failure to adapt to the mix of types of advertising we will sell and
developments relating to advertising on the Web;
- our failure to anticipate and adapt to a developing Internet market and
increased competition;
- our inability to upgrade, develop and deploy our network, systems and
infrastructure and attract new personnel in a timely and effective manner;
and
- the failure of our server and networking systems to handle traffic on our
Web sites efficiently.
SUBSTANTIALLY ALL OF OUR CUSTOMERS ARE INTERNET COMPANIES AND OUR BUSINESS WILL
BE SERIOUSLY HARMED IF THE INTERNET DOES NOT BECOME A VIABLE COMMERCIAL
MARKETPLACE
Substantially all of our customers are Internet companies that are dependent
upon the acceptance of the Internet as a viable commercial marketplace. If the
use of the Internet for e-commerce transactions and as an advertising medium
does not continue to grow, we could lose a substantial portion of our customer
base, which would seriously harm our business and financial condition.
WE ANTICIPATE OUR BUSINESS WILL FLUCTUATE FROM QUARTER TO QUARTER DUE TO OUR
INITIAL RELIANCE ON SHORT-TERM ADVERTISING AGREEMENTS AND SEASONAL
FLUCTUATIONS, WHICH COULD HARM OUR RESULTS OF OPERATIONS
Initially, a substantial portion of our net revenue is expected to be from
short-term advertising contracts, usually one to two months in length. That
means our quarterly operating results will be a function of the contracts we
enter into within the quarter and our ability to adjust spending in light of any
net revenue shortfalls. As a result, the cancellation of even a small number of
advertising contracts could significantly affect our operating results. Our
operating expenses are likely to increase significantly over the near term. To
the extent that our expenses increase but our revenues do not, our business,
operating results and financial condition may be seriously harmed.
Advertising revenues are also subject to seasonal fluctuations.
Historically, advertisers spend less in the first and third calendar quarters
and user traffic on online media properties has been lower during the summer and
during year-end vacation and holiday periods. As a result, we expect our results
of operations to fluctuate throughout the year, which may have a material
adverse effect on our business and financial condition.
OUR ADVERTISING REVENUE MAY BE AFFECTED BY THE LOSS OF TRAFFIC ON OUR WEB SITES
Advertising revenue is linked to the level of traffic on our Web sites, so
if traffic is less than the level expected by our advertising customers, revenue
from this source could be reduced. We will have some advertising contracts that
include a guaranteed minimum number of impressions on our Web sites. Reduced
traffic on our Web sites would cause us to fall short in meeting these minimum
requirements and, as a result, we may give credits to our advertisers and reduce
advertising rates, which would lead to a reduction in our revenue from
advertising.
OUR FAILURE TO ATTRACT ADVERTISING REVENUE IN QUANTITIES AND AT RATES THAT ARE
SATISFACTORY TO US COULD HARM OUR BUSINESS
We expect to derive a significant portion of our net revenue from the sale
of advertisements, including banners, buttons, windows and text links. It is
uncertain whether Web advertising will continue to grow at a rate that will
support expansion in our revenue. The Internet as a marketing and advertising
medium has not been available for a sufficient period of time to gauge
accurately
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its effectiveness as compared with traditional media. Many of our suppliers and
advertisers have only limited experience with the Web as a marketing and
advertising medium.
The ability to generate significant advertising revenues will depend upon:
- the development of a large base of users of services possessing
demographic characteristics attractive to advertisers;
- the ability to continue to develop and update effective advertising
delivery and measurement systems; and
- advertising rates, which may fall based on increased competition from
online companies and offline media.
No standards have yet been widely accepted for the measurement of the
effectiveness of Web-based advertising. Advertisers may determine that banner
advertising, which currently comprises a substantial portion of our revenues, is
not an effective advertising medium. If other forms of Web-based advertising
prove more popular than banner advertisements, we may not be able to change our
operations to take advantage of such forms. Advertising filter software programs
are available that limit or remove advertising from an Internet user's desktop.
Such software, if generally adopted by users, may have a materially adverse
effect upon the viability of advertising on the Internet. Our advertising
customers may not accept the internal and third-party measurements of
impressions received by advertisements on our online media properties and such
measurements may contain errors. We rely primarily on our internal advertising
sales force for domestic advertising sales, which involves additional risks and
uncertainties, including risks associated with the recruitment, retention,
management, training and motivation of sales personnel. As a result of these
factors, we may not be able to sustain or increase advertising sales levels.
Failure to do so may harm our business, operating results and financial
position.
WE ARE IN A HIGHLY COMPETITIVE INDUSTRY AND SOME OF OUR COMPETITORS MAY BE MORE
SUCCESSFUL IN ATTRACTING AND RETAINING CUSTOMERS
The market for Internet products and services is highly competitive.
Generally, there are no substantial barriers to entry in these markets; however,
the ability to secure financial resources necessary to promote brand awareness
is increasingly becoming a barrier to entry in the market in which we compete.
We expect that competition will continue to intensify. Negative competitive
developments could seriously harm our business and the trading price of our
Class A common stock. In addition, our competitors may still have superior or
more attractive product offerings.
We will compete with many other providers of online navigation, information
and community services, such as Yahoo! (including GeoCities and Broadcast.com),
America Online (including AOL.com, Netcenter and ICQ), AltaVista, Excite@Home,
Disney (including the GO Network, which is jointly operated with Infoseek),
Lycos (including HotBot and Tripod) and Microsoft Corporation (including
msn.com).
Our businesses compete directly with a great number of other Internet sites
and other media companies across a wide range of different online services with
advantages in technical expertise, brand recognition and other factors,
including:
- metasearch services and software applications that allow a user to search
the databases of several directories and catalogs simultaneously;
- database vendors that offer information search and retrieval capabilities
with their core database products;
- Web-based e-mail and instant messaging services either on a stand alone
basis or integrated into other products and media properties;
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- online merchant hosting services and the entry of an increasing number of
companies selling goods and services on the Internet;
- online content Web sites such as ESPN.com and ZDNet.com;
- online local interactive content Web sites, such as Excite@Home's City
Guides, Lycos City Guides, America Online's Digital City, Ticketmaster
Online-CitySearch and Yahoo! Get Local.
- online video broadcast services, such as CNN VideoSelect, RealNetworks and
FoxNews;
- online community Web sites, such as iVillage, Tripod, WhoWhere, GeoCities
and theglobe.com; and
- potential new entrants in any one or all of these areas, or new areas not
considered.
In order to effectively compete, we may need to expend significant internal
engineering resources or acquire other technologies and companies to provide
such capabilities. Any of these acquisitions could be dilutive to our
stockholders.
Our carriage agreement with CNET limits CNET's ability to compete with Snap
to provide a broad based information, navigation and content aggregation
service. These restrictions, however, will no longer apply after May 9, 2000. As
a result, CNET could become a competitor of Snap. Competition from CNET could
seriously harm our business.
IF OUR INVESTMENT OF RESOURCES IN DEVELOPING AND PROMOTING OUR ONLINE BRANDS IS
NOT SUCCESSFUL, THE RESULTS OF OUR OPERATIONS COULD BE SERIOUSLY HARMED
As the number of Internet sites grows, brand recognition will play an
increasingly important role in the success of Internet companies. Establishing
and promoting our online brands in the face of pressures from our competitors
will be critical to further developing our member and user base as well as
various strategic and commercial relationships. We will need to continue to
devote substantial financial and other resources to increase and maintain the
awareness of our online brands among members, advertisers and e-commerce
partners through:
- Web advertising and marketing;
- traditional media advertising campaigns in television, print, radio and
billboards; and
- providing a high quality user experience.
For this purpose, we have agreed to purchase at least $405 million of
promotional services from NBC over a four year period to develop and promote our
online brands as well as our products and services. Our results of operations
could be seriously harmed if this investment of financial and other resources in
developing and promoting our online brands does not generate a corresponding
increase in net revenue, or if the expense of developing and promoting our
online brands becomes excessive.
IF FUTURE ACQUISITIONS ARE NOT SUCCESSFUL, OR IF WE ARE NOT ABLE TO STRUCTURE
FUTURE ACQUISITIONS IN A FINANCIALLY EFFICIENT MANNER, THERE COULD BE AN
ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS
Acquiring complementary businesses, products and technologies is an integral
part of our business strategy. We are and will continue to be engaged in
exploring potential acquisitions both of publicly traded and private companies.
This acquisition strategy will subject us to integration risks similar to those
we face in integrating our current businesses. In addition, the success of the
acquisitions will be dependent upon the ability of our management to maximize
our financial and strategic position when incorporating the technology or
businesses. Any of these risks could prevent us from realizing significant
benefits from our acquisitions.
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In addition, we may invest in business areas in which we do not currently
compete. Such acquisitions represent greater risks as we would be entering
markets, at potentially great expense, where we have little or no direct prior
experience. Accordingly, such acquisitions, if unsuccessful, could have a
significant adverse impact on our financial condition and the price of our
Class A common stock. Even if we believe an acquisition is in our best interest,
investors or securities analysts may disagree and the size of a potential
acquisition could adversely impact the price of our Class A common stock. We may
also engage in other forms of financial transactions such as spin-offs or
initial public offerings of common stock of our subsidiaries. These transactions
or large acquisitions could effectively change our corporate structure, without
providing you an opportunity to vote on the transaction. We cannot assure you
that such acquisition or investment strategies, if implemented, will prove
successful.
We will face increased competition with other entities for desirable
acquisition targets. Like several of our competitors and other Internet
companies, we expect to issue common stock in future acquisitions. If the market
price of our Class A common stock suffers declines which are disproportionate
relative to our competitors or fails to keep pace with any increases in the
price of the stock of our competitors, we may not be able to compete with other
entities for desirable acquisition candidates. Our inability to acquire
complementary businesses, products and technologies may seriously harm our
business and results of operations.
In addition, issuing Class A common stock in acquisitions will dilute our
existing stockholders, while the use of cash will deplete cash reserves. We
anticipate that we will be unable to account for future acquisitions under the
"pooling of interests" method of accounting and, therefore, expect to incur
significant, one-time write-offs and amortization charges. These write-offs and
charges would decrease our future earnings or increase our future losses. Due to
all of the foregoing, our inability to structure acquisitions in a financially
efficient manner may seriously harm our business and results of operations.
THE USE OF A COMMUNITY PLATFORM IS UNPROVEN AND DEPENDS ON MAINTAINING AND
EXPANDING OUR MEMBERSHIP BASE; WE DO NOT KNOW WHETHER OUR COMMUNITY PLATFORM
WILL BE VIABLE AND PROFITABLE
A part of our business model relies on using our community platform and
membership base to generate revenues from different sources. To be profitable,
we will need to provide goods and services that are attractive to our members,
advertisers and vendors. We had previously relied on member-generated content
and the "grassroots" voluntary promotional efforts of our members to develop and
maintain our profile as a community site. A decline in voluntary promotional
activities by the members or member-generated content could make our community
services less attractive.
We cannot be sure that Internet users will continue to be interested in
communities on the Web, or that direct e-mail marketing will prove to be a
profitable or effective method of selling goods and services.
WE WILL NOT BE ABLE TO SUSTAIN THE RAPID GROWTH OF OUR INTERNET PROPERTIES
Although Xoom.com and Snap have experienced rapid growth in net revenues,
members, customers and reach in recent periods, these growth rates are likely
not sustainable. These growth rates will likely decrease and are not indicative
of future growth rates we may experience.
ANY FAILURE OF OUR NETWORK INFRASTRUCTURE COULD SERIOUSLY HARM OUR RESULTS OF
OPERATIONS
Our success depends upon the capacity, reliability and security of our
networking hardware and software infrastructure. Any failure in our networking
hardware and software infrastructure could significantly and adversely impact
the results of our operations.
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Our businesses have developed systems for maintaining their Web sites,
processing transactions and managing orders internally. If, in the future, we
cannot modify these systems to accommodate increased traffic and an increased
volume of transactions and orders, we could suffer from slower response times,
problems with customer service and delays in reporting accurate financial
information.
We use network servers that are housed separately by application at Exodus
Communications, Inc. in Santa Clara, California and GlobalCrossing Global Center
in Sunnyvale, California. Our Web sites are connected to the Internet via
multiple links on a 24 hour-a-day, seven days per week basis by Exodus and
GlobalCrossing Global Center. Exodus and GlobalCrossing Global Center also
provide and manage power and maintain the correct environment for our networking
and server equipment. We manage and monitor our servers and network remotely
from our headquarters in San Francisco, California. We strive to rapidly develop
and deploy high-quality tools and features into our systems without interruption
or degradation in service.
Although agreements with hosting companies will give us remedies for service
interruptions, we cannot guarantee that:
- we will have uninterrupted access to the Internet;
- our members and users will be able to reach our Web sites; or
- communications via our Web sites will be secure.
Any disruption in the Internet access provided by our hosting companies, or
any interruption in the service that our hosting companies receive from other
providers, or any failure of our hosting companies to handle higher volumes of
Internet users to our Web sites, could seriously harm our business, results of
operations and financial condition.
Despite precautions taken by our businesses and by the companies that host
our Web sites, our systems are susceptible to natural and man-made disasters
such as earthquakes, fires, floods, power loss and sabotage. Our systems also
may be vulnerable to disruptions from computer viruses and attempts by hackers
to penetrate our network security.
We are covered by insurance for loss of income from some of the events
listed above, but this insurance may not be adequate to cover all instances of
system failure. We also have insurance against loss of income due to
earthquakes, but the amount of such insurance may be insufficient, especially
given the frequency and magnitude of earthquakes in Northern California where
our primary facilities and servers are located.
Any of the events listed above could cause interference, delays, service
interruptions or suspensions and seriously harm our business and results of
operations.
We must continue to expand and adapt our system infrastructure to keep pace
with the increase in the number of members who use the free services we provide.
Demands on infrastructure that exceed our current forecasts could result in
technical difficulties with our Web sites. Any system failure that interferes
with the access to our Web sites and the use of the free services we provide
could diminish the level of traffic on our Web sites. Continuing or repeated
system failures could impair our reputation and our brand names and reduce our
commerce and advertising revenue. At present, we do not know if we will be able
to scale the systems to handle a larger amount of traffic at higher transmission
speeds. Expanding the network infrastructure will require substantial financial,
operational and management resources, all of which could harm our operations.
If, in the future, we cannot modify these systems to accommodate increased
traffic and an increased volume of transactions and orders, we could suffer
slower response times, problems with
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customer service and delays in reporting accurate financial information. Any of
these factors could significantly and adversely impact the results of our
operations.
DIFFICULTIES WE MAY ENCOUNTER IN DEALING WITH OUR GROWTH AND EXPANSION COULD
SERIOUSLY HARM OUR RESULTS OF OPERATIONS
Our strategy is to continue growing our membership and user base at a rapid
pace. If this growth continues, we will experience a significant strain on our
resources because of:
- the need to manage relationships with various strategic partners,
technology licensors, members, advertisers and other third parties;
- difficulties in hiring and retaining skilled personnel necessary to
support our businesses;
- the need to train and manage a growing employee base; and
- pressures for the continued development of our financial and information
management systems.
Difficulties we may encounter in dealing successfully with the above risks
could seriously harm our operations. In addition, in the first quarter of 2000
we expect to move our headquarter facilities to a new facility in San Francisco.
The move could cause disruption of our business or otherwise divert management's
attention which could harm our financial results.
THE SUCCESSFUL OPERATION OF OUR BUSINESS DEPENDS UPON THE SUPPLY OF CRITICAL
ELEMENTS FROM OTHER COMPANIES
In addition to the infrastructure, we will depend substantially upon third
parties for several critical elements of our business including technology,
order fulfillment, content development and distribution activities.
TECHNOLOGY: We will continue to license technology and related databases
from third parties for some elements of our properties, including, among others,
technology underlying the delivery of stock quotes and current financial
information, chat services, street mapping, telephone listings and similar
services. We expect to experience interruptions and delays in service and
availability for such elements, from time to time. Furthermore, we will be
dependent on hardware suppliers for prompt delivery, installation and service of
servers and other equipment used to deliver our products and services. Any
errors, failures, or delays experienced in connection with these third-party
products and information services could negatively affect our relationship with
users and adversely affect our brands and business, and could expose us to third
party liability.
ORDER FULFILLMENT: We continue to rely on other companies for critical
aspects of our e-commerce business. For example, Banta Global Turnkey
Corporation is primarily responsible for fulfilling orders for products and
services sold via our Web sites and in response to direct e-mail marketing. If
our relationship with Banta were to terminate without sufficient advance notice,
our operations would be negatively affected, even if we were able to quickly
establish a relationship with a comparable vendor to fulfill orders. The success
of our specific e-mail direct e-commerce campaigns depends on the timely supply
of inventory by the manufacturers and suppliers of the products we offer for
sale to our members. The failure of the suppliers on whom we depend would
adversely affect the results of our operations.
CONTENT DEVELOPMENT: A key element of our strategy involves the
implementation of our branded online properties targeted for specific interest
areas, demographic groups and geographic areas. In these efforts, we rely on
content development and localization efforts of third parties. We cannot
guarantee that the third parties will effectively implement these properties, or
that their
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efforts will result in significant revenue to us. Any failure of these parties
to develop and maintain high-quality and successful media properties also could
hurt our brands.
DISTRIBUTION RELATIONSHIPS: In order to create traffic for our online
properties and make them more attractive to advertisers and consumers, we expect
to have distribution agreements and informal relationships with leading Web
browser providers and portals, operators of online networks and leading Web
sites, manufacturers of Internet devices and computer manufacturers. These
distribution arrangements typically are not exclusive, and may be terminated
upon little or no notice. Third parties that provide distribution typically
charge fees or otherwise impose additional conditions on the listing of our
online properties. Any failure to cost-effectively obtain distribution could
seriously harm our business, results of operations and financial condition.
PLANNED INTERNATIONAL OPERATIONS ARE SUBJECT TO RISKS THAT COULD SERIOUSLY HARM
OUR RESULTS OF OPERATIONS
We plan to establish operations or form business partnerships in other parts
of the world. We have very limited experience in international markets and may
not be able to compete effectively in international markets. The expansion of
operations into international markets will require substantial management
attention and financial resources. We cannot be certain that our investment in
establishing operations in other countries will produce desired levels of
revenue. In addition, international operations are subject to other inherent
risks and problems, including:
- the impact of recessions in economies outside the United States;
- slower adoption of the Internet by users and advertisers in foreign
countries;
- greater difficulty in collecting accounts receivable;
- higher costs to develop new or specialized content;
- widely varied and changing regulatory requirements;
- difficulties and costs of staffing and managing foreign operations;
- reduced protection for intellectual property rights in some countries;
- political and economic instability;
- continued acceptance of the Euro;
- fluctuations in currency exchange rates; and
- difficulty in maintaining effective communications due to distance and
language and cultural barriers.
Some or all of the above factors could seriously harm our operations.
TO BE SUCCESSFUL IN THE CONTINUALLY EVOLVING MARKET FOR ONLINE SERVICES, WE MUST
CONTINUE TO ENHANCE OUR PROPERTIES AND DEVELOP NEW ONES
Rapid technological change, changing customer needs, frequent new product
and service introductions and evolving industry standards characterize the
Internet market. These market characteristics could render our existing
services, technology and systems obsolete. We must continually improve the
performance features and reliability of our services to respond to evolving
market demands and competition. Our business, operating results and financial
condition would be seriously harmed if we are unable to respond in a
cost-effective and timely manner to changing market conditions or customer
requirements.
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To remain competitive, we must continue to enhance and improve the
functionality, features and content of our Web sites. We may not be able to
successfully maintain competitive user response times or implement new features
and functions, as these changes will likely involve the development of
increasingly complex technologies. Personalized information services, such as
our Web-based e-mail services, message boards, stock portfolios and our
community features, require significantly greater expenses than our general
services. We cannot guarantee that these higher expenses will be offset by
additional revenues.
A key element of our business strategy is the development and introduction
of new branded online properties targeted for specific user groups with
particular demographic characteristics and geographic concentration. We may not
be successful in developing, introducing and marketing such products or media
properties and such properties may not achieve market acceptance, enhance our
brand name recognition or increase user traffic. Furthermore, enhancements of or
improvements to our Web sites or new media properties may contain undetected
errors that require significant design modifications, resulting in a loss of
customer confidence and user support and a decrease in the value of our brand
name. If we fail to effectively develop and introduce new properties, or those
properties fail to achieve market acceptance, our business, results of
operations and financial condition could be seriously harmed.
OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD SERIOUSLY HARM
OUR BUSINESS AND FINANCIAL CONDITION
We view our technology as proprietary and will seek to protect it under
existing United States and international laws relating to protection of
intellectual property. We will also develop internal procedures to control
access to and dissemination of our proprietary information. Despite our
precautions, third parties may succeed in misappropriating our intellectual
property or independently developing similar intellectual property. Protecting
our intellectual property against infringement could result in substantial legal
and other costs and could divert our limited management resources and attention.
This could adversely impact our business and the results of our operations.
Some of the technology to be incorporated into our Web sites is based on
technology licensed from third parties. As we continue to introduce new
services, we may need to license additional technology. If we are unable to
license needed technology in a timely manner and on commercially reasonable
terms, we could experience delays and reductions in the quality of our services,
all of which could seriously harm our business and results of operations. Our
reputation and the value of our proprietary information could also be adversely
affected by actions of third parties to whom we license our proprietary
information and intellectual property. If someone asserts a claim relating to
proprietary technology or information against us, it may be necessary to seek a
license to such intellectual property. We cannot assure you, however, that we
will be able to obtain such licenses on commercially reasonable terms, if at
all. The failure to obtain any necessary licenses or other rights could
seriously harm our business and results of operations.
Each of our businesses has been subject to claims that they have allegedly
infringed the proprietary rights of third parties, and we cannot assure you that
third parties will not assert claims against us or our businesses in the future.
These claims, whether or not meritorious, sometimes result in litigation and
could become a drain on our management and financial resources. If successful,
claims of this nature could subject us to liability for money damages as well as
injunctive relief restricting our use of intellectual property important to our
operations, and could ultimately cause us to lose rights to some of our
intellectual property. Any of these events could seriously harm our business and
results of operations.
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WE COULD BE SUBJECT TO LIABILITY FOR ONLINE CONTENT THAT MAY NOT BE COVERED BY
OUR INSURANCE
The nature and breadth of information disseminated on our Web sites and
through the sites of our members could expose us to liability in various areas,
including claims relating to:
- product information and reviews we offer;
- the content and publication of various materials based on defamation,
libel, negligence, personal injury and other legal theories;
- copyright or trademark infringement and wrongful action due to the actions
of third parties;
- use of third party content made available through our Web sites or through
content and material posted by members on their home pages or in chat
rooms and bulletin boards; and
- damages arising from the use or misuse of the free e-mail services we will
offer.
Claims of these kinds against us could result in us incurring substantial
costs and could also be a drain on our financial and other resources. If the
number or severity of claims of this nature were significant, we would need to
implement measures to reduce our exposure and potential liability. In addition
to being a drain on our resources, this could also require taking measures that
could make our services less attractive to our members and visitors. This in
turn could reduce traffic on our Web sites, negatively impact our member and
user base, and reduce our revenue from e-commerce and advertising. Our general
liability insurance may be insufficient to cover expenses and losses arising in
connection with any claims against us. To the extent our insurance coverage does
not cover liability or expenses we incur, our business and results of operations
would be seriously harmed.
E-COMMERCE ACTIVITIES MAY EXPOSE US TO UNCERTAIN LEGAL RISKS AND POTENTIAL
LIABILITIES
As part of our business, we will enter into agreements with sponsors,
content providers, service providers and merchants under which we are entitled
to receive a share of revenue from the purchase of goods and services by users
of our Web sites. In addition, we will provide hosting and other services to
online merchants. These types of arrangements may expose us to additional legal
risks and uncertainties, including potential liabilities relating to the
products and services offered by such third parties.
Although we will maintain liability insurance, insurance may not cover these
claims or may not be adequate. Even to the extent these types of claims do not
result in material liability, investigating and defending claims is expensive
and, if the number or severity of claims defended were significant, this could
seriously harm our business and operations.
WE COULD FACE LIABILITY FROM LEGAL PROCEEDINGS OF XOOM.COM AND SNAP THAT COULD
SERIOUSLY HARM OUR BUSINESS AND RESULTS OF OPERATIONS
Because Snap and Xoom.com are our wholly owned subsidiaries, claims made
against Snap and Xoom.com will impact our financial condition and results of
operations. Snap is currently litigating one matter and Xoom.com is litigating
three matters. See "Business--Legal Proceedings." An unfavorable outcome in any
of this litigation could seriously harm our business and results of operations
and the market price of our Class A common stock.
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IF OUR CAPITAL IS INSUFFICIENT TO PROMOTE OUR BUSINESS, AND IF WE CANNOT OBTAIN
NEEDED FINANCING, WE WILL BE UNABLE TO PROMOTE OUR BRAND NAMES, EXPLOIT
ACQUISITION OPPORTUNITIES AND OTHERWISE MAINTAIN OUR POSITION RELATIVE TO OUR
COMPETITORS
We believe we have sufficient capital resources to support our operations at
least for the next 12 months. Nevertheless, we anticipate that we will need to
raise funds to maintain and develop our position in the marketplace. It may be
difficult or impossible for us to obtain financing on favorable terms, if at
all. Neither GE nor its affiliates, including NBC, has made any commitment to
provide financing to us. We cannot assure you that there will be a market for
our securities at any time when we may seek to raise needed funds by equity
financing. Raising funds by issuing equity securities or convertible debt
securities will dilute the percentage ownership of our stockholders, subject to
NBC's exercise of its preemptive rights, and we cannot assure you that an
offering of securities would be completed successfully. Also, new securities we
may issue could have rights senior to the rights of our common stock. If we
cannot obtain needed financing, we could jeopardize our ability to complete the
integration of our Web properties and otherwise meet our business plan and we
will likely be unable to promote our brand names, take advantage of acquisition
opportunities and otherwise maintain our position relative to that of our
competitors, which could seriously harm our business and results of operations.
IF IMPORTANT STRATEGIC RELATIONSHIPS ARE DISCONTINUED FOR ANY REASON, THERE
WOULD BE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND FINANCIAL CONDITION
Although strategic relationships are a key factor in our overall business
strategy, our strategic partners may not view their relationships with us as
significant to their own business. There is a risk that parties with whom we
will have strategic alliance agreements may not perform their obligations as
agreed. We expect that our arrangements with strategic partners generally will
not establish minimum performance requirements but instead rely on the voluntary
efforts of our partners. In addition, we expect that most of our agreements with
strategic partners will be terminable by either party with little notice. If
important strategic relationships are discontinued for any reason, our business
and results of operations may be harmed.
RISKS RELATED TO OUR ORGANIZATIONAL STRUCTURE AND OUR RELATIONSHIP WITH NBC
BECAUSE NBC HAS SIGNIFICANT INFLUENCE OVER OUR MANAGEMENT AND STRATEGY, THE
ABILITY OF THE HOLDERS OF OUR CLASS A COMMON STOCK TO DETERMINE THE OUTCOME OF
MATTERS WILL BE REDUCED
After the offering, NBC and its affiliates will own approximately 43.9% of
our outstanding common stock. If the convertible notes held by NBC are
converted, this ownership interest could increase up to approximately 49.2%,
although such conversion cannot occur until November 30, 2000. Even before the
convertible notes are converted, however, CNET has agreed to vote its shares of
Class A common stock in the same manner as NBC with respect to change in control
transactions involving us, enabling NBC to determine the outcome of such vote.
In addition, NBC and its affiliates have rights to maintain their percentage
ownership in the event of dilutive issuances of stock by us. As a result, NBC
may be able to exercise significant influence in the future over many matters
requiring approval by our stockholders, including amending our certificate of
incorporation and bylaws, the issuance of additional shares of our Class B
common stock or the adoption of a stockholders rights plan.
In addition, NBC and its affiliates have the right to elect six of the 13
members of our board of directors, and will retain that right so long as they
own 20% of the outstanding shares of our common stock. Following conversion of
the convertible notes, for so long as NBC and its affiliates own 35% or more of
the outstanding shares of our common stock, NBC and its affiliates will have
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<PAGE>
the right to elect seven of the 13 members of our board of directors. As long as
the NBC directors do not constitute a majority of our board of directors,
several significant corporate actions by us will require the approval of our
directors appointed by NBC, including a change in control of us or our
significant subsidiaries and significant sales of assets or securities. For as
long as there are any Class B directors, those directors will have the exclusive
ability to remove our chief executive officer and to appoint our chief financial
officer and our general counsel. In addition, Robert C. Wright, the president
and chief executive officer of NBC, serves as our chairman of the board. Many of
these rights are embodied in our certificate of incorporation, and as a result
any amendment will require a vote of our stockholders. See "Description of
Capital Stock."
Because of these rights, NBC has the ability to exert significant influence
over our management and strategy. While our directors appointed by NBC are
obligated by Delaware law to act in the best interests of NBCi and its
stockholders, NBC's views concerning our management and strategy may be
different from the views held by directors appointed by the holders of shares of
our Class A common stock.
NBC WILL BE ABLE TO ENGAGE FREELY IN MANY ACTIVITIES THAT MAY BE COMPETITIVE
WITH OUR BUSINESS
Under our brand integration and license agreement with NBC, NBC is obligated
not to co-brand the portal, community and e-commerce services of our competitors
with specified NBC marks, and NBC may not operate a general portal service, a
broad-based community service or a broad-based e-commerce service other than
through us. However, apart from the restrictions in the brand integration and
license agreement, our certificate of incorporation provides that NBC has the
right to engage in, and has no duty to refrain from engaging in, the same or
similar activities or lines of business as we do, to do business with our
potential or actual customers and suppliers and to employ any of our employees.
In the event that NBC learns of a potential corporate opportunity to both NBC
and us, NBC has no duty to communicate or present the opportunity to our
management. NBC will have no liability to us or our stockholders for breach of
any fiduciary duty which may be applicable to NBC as one of our major
stockholders for acquiring or pursuing any corporate opportunity for itself,
directing the opportunity to another person or company, or failing to
communicate information about the opportunity to us.
Moreover, our certificate of incorporation provides that persons who are
directors or officers of us and also of NBC are deemed to have fully satisfied
their fiduciary duties to us with respect to corporate opportunities of NBC and
NBCi if they act consistently with the policy regarding corporate opportunities
set forth in our certificate of incorporation. In particular, a corporate
opportunity offered to any person who is a director, but not an officer, of us
and who is also a director or officer of NBC belongs to us only if offered in
writing to such person solely in his or her capacity as our director, and
otherwise such corporate opportunity belongs to NBC.
These provisions are effective for so long as NBC owns at least 20% of our
common stock and at least one person who is one of our directors or officers is
also a director or officer of NBC. In addition, amendment of these provisions of
our certificate of incorporation in a manner adverse to NBC's interests requires
the approval of holders of at least 80% of our outstanding common stock.
Although as our principal stockholder NBC has a significant financial
interest in our success, NBC also has the objective of maximizing value for its
parent company, General Electric, and the stockholders of GE. There may be
circumstances under which NBC's corporate objectives conflict with our
operations or strategy, and, except as may otherwise be required by law, NBC has
no obligation to act in a manner beneficial to us in the event of such a
conflict. For example, NBC has entered into a distribution and marketing
agreement with ValueVision International, Inc. with respect to its home shopping
and transactional television service, and an affiliate of NBC is a principal
23
<PAGE>
shareholder of ValueVision. NBC is also the parent company of the CNBC cable
channel and owns 90% of CNBC.com LLC. Moreover, NBC distributes its owned and
licensed television programming and other content over a wide array of media in
varied formats, including videostreaming and other methods of distribution of
video content via the Internet, and there is no limitation on its ability to
continue to do so or to develop new methods of distribution or delivery or forms
of content independently from us. In addition, the value of NBC-IN.com will be
dependent on our ability to negotiate content and distribution relationships
with NBC's affiliated television stations, including the 13 stations owned and
operated by NBC. Although NBC is obligated to comply with the terms of the brand
integration and license agreement, we cannot assure you that NBC will not engage
in activities which are competitive with or otherwise negatively affect our
business. Any such action by NBC may seriously harm our business, operating
results and financial condition.
NBC'S RELATIONSHIPS WITH OUR STRATEGIC PARTNERS WILL LIMIT OUR ABILITY TO ENTER
INTO STRATEGIC RELATIONSHIPS AND TO PROVIDE NEWS, INCLUDING SPORTS AND
BUSINESS NEWS, ON OUR WEB SITES
Our relationships with our existing strategic partners and our future
relationships with partners may limit our ability to enter into other strategic
relationships or provide services that we might otherwise offer on our Web
sites. For example, NBC has a relationship with Microsoft which limits in
significant respects the ability of NBC and its affiliates to provide news,
including sports and business news, on any Web site other than MSNBC.com.
Consequently, our ability to develop and present news content on our sites is
limited, and our efforts must be consistent with these restrictions. In
addition, the ability of NBC and its affiliates to deliver business news video
on an interactive basis via the Internet is restricted by the terms of NBC's
joint ventures with Microsoft and Dow Jones. We may enter into similar or other
non-competition arrangements with strategic partners that may limit our ability
to engage in or provide some activities or services.
WE WILL BE SIGNIFICANTLY DEPENDENT UPON THE QUALITY OF THE NBC BRAND
A deterioration in the quality or value of the NBC brand or the termination
of the brand integration and license agreement may seriously harm our business,
operating results and financial condition. Our licensed use of the NBC brand is
a critical aspect of our efforts to retain, attract and expand our user and
advertiser base, both through the advertising and promotion we will purchase on
the NBC television network as well as the inclusion of the NBC brand on our Web
sites. The television industry is characterized by a small number of
participants with significant financial resources and substantial experience in
a wide variety of media, and consequently is extremely competitive. The success
of each television network is often dependent upon its ability to deliver
programming that appeals to viewers. Television programming often requires
substantial lead time to develop and produce, and seasonal network schedules are
typically designed months before actually being aired. This limits a network's
flexibility to alter programming to respond to changes in viewers' tastes. The
relative ranking of television networks fluctuates continuously. Each network
conducts its own research and obtains research from third parties in order to
evaluate its appeal to a complex variety of demographic groups, and each network
uses this information to promote its television programming and negotiate
pricing with advertisers. While NBC has enjoyed significant success in broadcast
and cable television and expects to continue to devote its efforts to continuing
this success, we cannot be assured that NBC television programming will continue
to appeal to viewers generally, or to the particular demographic groups which
are valued by advertisers. Consequently, we cannot predict the extent to which
use of the NBC brand will have a positive effect on our ability to attract users
and advertisers. In addition, NBC may terminate the brand integration and
license agreement if, among other reasons, its percentage ownership in us
declines to 5% or less, or if there is a change in control of us.
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<PAGE>
THE SIGNIFICANT INFLUENCE OF NBC AND ANTI-TAKEOVER PROVISIONS IN OUR CHARTER
DOCUMENTS COULD NEGATIVELY IMPACT OUR STOCKHOLDERS
NBC has significant influence with respect to our management and strategy.
As a result of NBC's influence, NBC is able to exercise effective control over
significant corporate transactions which may delay or prevent a change in
control. NBC and its affiliates have enhanced voting rights with respect to the
approval of significant corporate acquisition transactions. In the event that a
third party initiates a tender offer for our common stock or we agree to enter
into any transaction which would result in a change of control, the limitations
on NBC's ability to acquire additional shares in us, to solicit proxies in
connection with an amendment to our certificate of incorporation or for the
election of Class A Directors, or to propose to the holders of the Class A
common stock a merger, business combination or similar transaction terminate.
Moreover, NBC can terminate our use of the NBC trademarks and logos in the event
of a change of control of us. Other provisions of our charter documents could
make it more difficult for a third party to acquire us, even if doing so would
be beneficial to our stockholders. Any of these factors could impede or prevent
transactions that would cause a change in control in us. This might discourage
bids for our common stock at a premium over the market price of our common stock
and adversely affect the trading price of our common stock.
MARKET AND INDUSTRY RISKS
ANY INCREASE IN COMPETITION IN THE E-COMMERCE MARKET COULD ADVERSELY AFFECT OUR
ABILITY TO MAINTAIN OR IMPROVE OUR POSITION IN THE MARKET RELATIVE TO THAT OF
OUR COMPETITORS
We expect intense competition in the e-commerce market from an ever
increasing number of companies selling goods and services over the Internet.
These competitors include: traditional retailers, various mail-order retailers,
Internet-focused retailers, manufacturers that sell directly over the Internet
and many software companies. We expect new competitors to emerge.
Increased competition from these and other sources could require us to
respond by establishing pricing, marketing and other programs or seeking out
additional strategic alliances or acquisitions that may be less favorable to us
than we otherwise establish or obtain. Such outcomes could seriously harm our
business, prospects, financial condition and results of operations.
MARKET CONSOLIDATION HAS CREATED AND CONTINUES TO CREATE COMPANIES THAT ARE
LARGER AND HAVE GREATER RESOURCES THAN US
In the recent past, there have been a number of significant acquisitions and
strategic plans announced among and between our competitors, including:
- America Online's acquisition of Netscape and its proposed merger with Time
Warner, Inc.;
- CMGI's acquisition of 83% of AltaVista;
- Disney's acquisition of the remaining interest in Infoseek not already
owned by Disney;
- @Home Network's acquisition of Excite; and
- Yahoo!'s acquisitions of GeoCities and Broadcast.com.
The effects these completed and pending acquisitions and strategic plans
have on us cannot be predicted with accuracy, but some of these competitors are
aligned with companies that are larger or more well established than us. In
addition, these competitors include television broadcasters with access to
unique content and substantial marketing resources. As a result, these
competitors may have access to greater financial, marketing and technical
resources than us.
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RECENT ALLIANCES HAVE RESULTED IN COMPETITORS OFFERING A BROADER VARIETY OF
INTERNET RELATED SERVICES THROUGH MORE INTEGRATED WEB SITES AND THE USE OF
PROMINENT SEARCH BUTTONS TO DIRECT TRAFFIC, WHICH MAY MAKE IT MORE DIFFICULT
FOR INTERNET USERS TO FIND AND USE OUR PRODUCTS AND ONLINE PROPERTIES
As discussed above, recent acquisitions and alliances will result in greater
competition as more users of the Internet consolidate to fewer services that
incorporate search and retrieval features. In addition, providers of software
and other Internet products and services are incorporating search and retrieval
features into their offerings. For example, Web browsers offered by Microsoft
and by America Online's Netscape increasingly incorporate prominent search
buttons that direct search traffic to competing services. These features could
make it more difficult for Internet users to find and use our products and
services.
In the future, Netscape, Microsoft and other browser suppliers may also more
tightly integrate products and services similar to ours into their browsers or
their browsers' pre-set home pages. Microsoft recently announced that it will
feature and promote Internet search services provided by Alta Vista and signed a
long term partnership with LookSmart to provide directory services in the
Microsoft Network and other Microsoft online properties. Such search services
may be tightly integrated into future versions of the Microsoft operating
system, the Internet Explorer browser, and other software applications, and
Microsoft may promote such services within the Microsoft Network or through
other Microsoft affiliated end-user services such as WebTV Networks. Each of
these situations creates a potential competitive advantage over us because
Internet navigational offerings of competitors may be more conveniently accessed
by users.
OUR SUCCESS WILL DEPEND UPON THE GROWTH IN THE USE OF THE INTERNET FOR
E-COMMERCE TRANSACTIONS
Our future success also depends on the continued growth in the use of the
Internet and the Web for e-commerce transactions. Use of the Internet for retail
transactions is a recent development, and the continued demand and growth of a
market for services and products via the Internet is uncertain. The Internet may
ultimately prove not to be a viable commercial marketplace for a number of
reasons, including:
- unwillingness of consumers to shift their purchasing from traditional
retailers to online purchases;
- lack of acceptable security for data and concern for privacy of personal
information;
- limitations on access and ease of use;
- congestion leading to delayed or extended response times;
- inadequate development of Web infrastructure to keep pace with increased
levels of use; and
- increased or excessive government regulation.
Because of these factors, we do not know whether our business model will
ultimately be viable and profitable. It is also possible that, in the future,
some Internet access providers will act to block or limit the use of e-mail for
direct e-commerce solicitations, whether at their own initiative or at the
request of users. Our members may also choose not to receive our e-mail
offerings or may fail to respond to such offerings. If these blocking or
limiting programs become popular, there could be a negative effect upon the
viability of e-commerce on the Web and on our business, results of operations
and financial condition.
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COMPETITION FOR QUALIFIED PERSONNEL IS INTENSE, AND THE LOSS OF KEY PERSONNEL
AND OUR INABILITY TO ATTRACT AND RETAIN ADDITIONAL QUALIFIED PERSONNEL COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR RESULTS OF OPERATIONS
Our success depends to a significant degree upon the contributions of our
executive management team, most of whom have not previously worked together, as
well as our technical, marketing and sales personnel. Due to the integration of
the operations of our businesses, our employees may have different job
responsibilities and may be required to work with new people. Accordingly, we
may experience loss of key management and other personnel due to the change in
job responsibilities and work environment. Our employees may voluntarily
terminate their employment with us at any time. Our success also depends upon
our ability to attract and retain additional highly qualified management,
technical, sales and marketing and customer support personnel. Locating
personnel with the combination of skills and attributes required to carry out
our strategy is often a lengthy process. In addition, competition for qualified
employees is intense, specifically in the areas of Web site development, design
and integration. The loss of key personnel, or the inability to attract and
retain additional, qualified personnel, could have a material adverse effect on
our results of operations.
THE YEAR 2000 PROBLEM COULD CAUSE OUR SOFTWARE PRODUCTS AND THOSE OF OUR
SUPPLIERS TO MALFUNCTION, WHICH COULD PREVENT OR LIMIT ACCESS TO OUR ONLINE
PROPERTIES AND COULD BE COSTLY TO REMEDY
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software that
records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. In addition, computer programs may
fail to recognize February 29, 2000 as a leap year date as a result of an
exception to the calculation of leap years that will occur in the year 2000 and
otherwise occurs only once every 400 years. Residual Year 2000 problems may
result in miscalculations, data corruption, system failures or disruption of
operations. To date we have not experienced any significant Year 2000 problems
in our internal technology systems or with the vendors of systems we believe to
be critical to our business. In addition, we believe that it is unlikely we will
experience any significant Year 2000 problems in the future.
However, our applications operate in complex network environments and
directly and indirectly interact with a number of other hardware and software
systems. We cannot predict whether Year 2000 unknown errors or defects that
affect the operation of software and systems that we use in operating our
businesses will arise in the future. If residual Year 2000 problems cause the
failure of any of the technology, software or systems necessary to operate our
business, we could lose customers, suffer significant disruptions in our
business, lose revenues and incur substantial liabilities and expenses. We could
also become involved in costly litigation resulting from Year 2000 problems.
This could seriously harm our business, financial condition and results of
operations.
REGULATORY AND LEGISLATIVE RISKS
IMPOSITION OF NEW TAXES OR FEES BY FEDERAL, STATE OR FOREIGN GOVERNMENTS ON
INTERNET TRANSACTIONS OR ON THE USE OF THE INTERNET AS A MEANS OF
COMMUNICATION COULD ADVERSELY AFFECT US
Imposition of sales or other similar taxes on our sales of merchandise in
states or countries where we ship goods could have a material adverse effect on
our results of operations. Imposition of new taxes or fees by federal, state or
foreign governments on Internet transactions or on the use of the Internet as a
means of communication could also adversely affect us.
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PRIVACY CONCERNS, GOVERNMENT REGULATION AND LEGAL UNCERTAINTIES COULD HAVE AN
ADVERSE EFFECT ON OUR BUSINESS AND RESULTS OF OPERATIONS
Laws and regulations that apply directly to communications or commerce over
the Internet are becoming more prevalent. The most recent session of the United
States Congress resulted in Internet laws regarding privacy and the protection
of children, copyrights, taxation and the transmission of sexually explicit
material. The European Union recently enacted its own privacy regulations and
other countries may do so in the future. In addition, new laws may be adopted in
the United States and in other countries covering issues such as music
licensing, broadcast licensing fees and the characteristics and quality of
Internet services. Laws regulating the Internet, however, remain largely
unsettled, even in areas where there has been some legislative action. It may
take years to determine whether and how existing laws that govern intellectual
property, privacy, libel and taxation apply to the Internet. The development of
laws governing these areas, or the application to the Internet of existing laws
not designed for the Internet, may decrease the growth in the use of the
Internet. In addition, the growth and development of the e-commerce market may
prompt calls for more stringent consumer protection laws, both in the United
States and abroad, that may impose additional burdens on companies conducting
business online. The adoption or modification of laws or regulations relating to
the Internet could adversely affect our business.
The Federal Communications Commission is currently reviewing its regulatory
positions on data transmissions over telecommunications networks and could seek
to impose some form of telecommunications carrier regulation on
telecommunications functions of information services. State public utility
commissions generally have declined to regulate information services, although
the public service commissions of some states continue to review potential
regulation of such services. Future regulation or regulatory changes could have
an adverse effect on our business and results of operations.
OFFERING RISKS
OUR STOCK PRICE MAY BE VOLATILE BASED ON A NUMBER OF FACTORS, SOME OF WHICH ARE
NOT IN OUR CONTROL
The trading price of our Class A common stock has been highly volatile. Our
stock price could be subject to wide fluctuations in response to a variety of
factors, many of which are out of our control, including:
- actual or anticipated variations in quarterly operating results;
- announcements of technological innovations;
- new products or services offered by us or our competitors;
- changes in financial estimates by securities analysts;
- conditions or trends in the Internet industry and the portal and community
services segment in particular;
- our announcement of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
- additions or departures of key personnel; and
- sales of common stock by us or our stockholders, which could occur at any
time after the closing of the transaction.
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In addition, The Nasdaq National Market, where most publicly held Internet
companies are traded, has recently experienced extreme price and volume
fluctuations. These fluctuations often have been unrelated or disproportionate
to the operating performance of these companies. The trading prices of many
Internet companies continue to trade at multiples of earnings or revenues which
are substantially above historic levels. These trading prices and multiples may
not be sustainable. These broad market and industry factors may materially
adversely affect the market price of our Class A common stock, regardless of our
actual operating performance. In the past, following periods of volatility in
the market price of an individual company's securities, securities class action
litigation often has been instituted against that company. This type of
litigation, if instituted, could result in substantial costs and a diversion of
management's attention and resources.
SALES OF SUBSTANTIAL AMOUNTS OF OUR CLASS A COMMON STOCK IN THE OPEN MARKET
COULD DEPRESS OUR STOCK PRICE
Sales of a substantial number of shares of Class A common stock in the
public market following this offering could cause the market price of our
Class A common stock to decline. See "Shares Eligible for Future Sale" for a
description of the eligibility of shares of our Class A common stock for future
sale.
OUR MANAGEMENT CAN SPEND MOST OF THE PROCEEDS FROM THIS OFFERING IN WAYS THAT DO
NOT INCREASE OUR RESULTS OF OPERATIONS OR MARKET SHARE
Our management can spend most of the proceeds from this offering in ways
which may not increase our results of operations or market share. In connection
with your decision to purchase the shares of our Class A common stock, you will
not have the opportunity to consider the uses to which the proceeds will be put.
We cannot predict that the proceeds will be invested to yield a favorable
return. See "Use of Proceeds."
AS A NEW INVESTOR, YOU WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL DILUTION
Investors purchasing shares of common stock in the offering will incur
immediate and substantial dilution in net tangible book value per share of the
common stock from the offering price of $81.375 per share. To the extent
outstanding options or warrants to purchase common stock are exercised, there
will be further dilution. See "Dilution."
THE TRACES TRANSACTION COULD CAUSE OUR STOCK PRICE TO DECLINE
The price of the shares of Class A common stock could become more volatile
and could be depressed by investors in anticipation of the potential
distribution into the market of additional shares of Class A common stock as a
result of the delivery of shares of Class A common stock by the NBCi Automatic
Common Exchange Securing Trust, by possible sales of shares of Class A common
stock by investors who view the TRACES as a more attractive means of equity
participation in us and by hedging or arbitrage trading activity that may
develop involving the TRACES and the Class A common stock.
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that are subject to a
number of risks and uncertainties, many of which are beyond our control, which
may include statements about our:
- plans for and ability to hire additional personnel;
- business strategy;
- expectations for future expansion both in the U.S. and internationally;
- anticipated growth in revenue from our various service offerings;
- uncertainty regarding our future operating results;
- anticipated sources of funds, including the proceeds from this offering,
to fund our operations for the 12 months following the date of this
prospectus; and
- plans, objectives, expectations and intentions contained in this
prospectus that are not historical facts.
All statements, other than statements of historical facts included in this
prospectus, regarding our strategy, future operations, financial position,
estimated revenues or losses, projected costs, prospects, plans and objectives
of management are forward-looking statements. When used in this prospectus, the
words "will", "believe", "anticipate", "intend", "estimate", "expect", "project"
and similar expressions are intended to identify forward-looking statements,
although not all forward-looking statements contain such identifying words. All
forward-looking statements speak only as of the date of this prospectus. You
should not place undue reliance on these forward-looking statements. Although we
believe that our plans, intentions and expectations reflected in or suggested by
the forward-looking statements we make in this prospectus are reasonable, we can
give no assurance that these plans, intentions or expectations will be achieved.
We disclose important factors that could cause our actual results to differ
materially from our expectations under "Risk Factors" and elsewhere in this
prospectus. These cautionary statements qualify all forward-looking statements
attributable to us or persons acting on our behalf.
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USE OF PROCEEDS
We estimate that we will receive net proceeds of $280,071,950 from the sale
of the 3,650,000 shares of Class A common stock in this offering at a public
offering price of $81.375 per share, after deducting the underwriting discount
and estimated offering expenses. We will not receive any proceeds from the sale
of the shares that the selling stockholders are selling.
We expect to use the net proceeds to expand our corporate infrastructure and
for general corporate purposes, including working capital and capital
expenditures. While we cannot predict with certainty how the proceeds of this
offering will be used, we currently intend to use them as follows:
- to develop new e-commerce channels;
- to expand our operations internationally;
- to build and enhance the value of our online brands;
- for potential acquisitions and minority investments; and
- for general corporate purposes, including capital expenditures and working
capital.
We expect to use a portion of the net proceeds to acquire or invest in
complementary businesses or obtain the right to use complementary technologies.
However, we have no current commitments or agreements with respect to any of
these types of investments. Pending these uses, the net proceeds of this
offering will be invested in short-term, investment-grade interest-bearing
investments or accounts.
The amounts we actually spend for the above purposes may vary significantly
and will depend on a number of factors, including our future revenue and cash
generated by operations and the other factors described under "Risk Factors."
Therefore, we will have broad discretion in the way we use the net proceeds. See
"Risk Factors--Our management may invest or spend the proceeds of this offering
in ways that do not increase our results of operations or market share" for more
information.
DIVIDEND POLICY
We have never declared or paid any cash dividends on shares of our common
stock. We intend to retain any future earnings for future growth and do not
anticipate paying any cash dividends in the foreseeable future.
PRICE RANGE OF CLASS A COMMON STOCK
Our Class A common stock has been traded on the Nasdaq National Market and
on the European Association of Securities Dealers Automated Quotation System
under the symbol "NBCI" since November 30, 1999. The following table sets forth,
for the periods indicated, the high and low sales prices for our common stock as
reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
Fourth Quarter (from November 30, 1999).................................. $ 95.00 $ 59.00
</TABLE>
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
First Quarter (through February 3, 2000)................................ $ 106.13 $ 69.50
</TABLE>
On February 3, 2000, the last reported sale price for our Class A common
stock on the Nasdaq National Market was $81.375 per share. As of February 3,
2000, we estimated that there were approximately 293 holders of record and over
19,300 beneficial owners of the Class A common stock.
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CAPITALIZATION
The following table sets forth our:
- pro forma capitalization at September 30, 1999; and
- pro forma adjusted capitalization, which gives effect to the sale in this
offering of 3,650,000 shares of Class A common stock at a public offering
price of $81.375 per share, after deducting the underwriting discount and
estimated offering expenses.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999
-----------------------------
PRO FORMA AS
PRO FORMA ADJUSTED
------------- --------------
(IN THOUSANDS, EXCEPT SHARE
DATA)
<S> <C> <C>
Long-term obligations, less current portion and amounts due to related parties..... $ 2,836 $ 2,836
Convertible notes payable due to NBC and its affiliates, less current portion...... 370,000 370,000
Stockholders' equity:
Preferred stock, $.0001 par value; 10,000,000 shares authorized, no shares issued
and outstanding:
Class A common stock, $.0001 par value; 100,000,000 shares authorized, shares
issued and outstanding:........................................................ 914,156 1,194,228
Pro forma: 26,746,708 shares
Pro forma As adjusted: 30,396,708 shares
Class B common stock, $.0001 par value, 100,000,000 shares authorized; shares
issued and outstanding:........................................................ 1,158,336 1,158,336
Pro forma: 24,550,708 shares
Pro forma as adjusted: 24,550,708
Note receivable from stockholders................................................ (995) (995)
Deferred compensation............................................................ (409) (409)
Accumulated deficit.............................................................. (32,980) (32,980)
------------- ------------
Total stockholders' equity..................................................... 2,038,108 2,318,180
------------- ------------
Total capitalization........................................................... $ 2,410,944 $ 2,691,016
============= ============
</TABLE>
This table excludes the following shares:
- 6,548,329 shares of Class A common stock issuable upon exercise of stock
options outstanding as of September 30, 1999 at a weighted average
exercise price of $21.53 per share granted under our 1999 stock incentive
plan;
- 3,155,002 shares of Class A common stock issuable upon exercise of options
granted subsequent to September 30, 1999 with a weighted average exercise
price of $61.38 per share;
- 924,526 shares issued upon exercise of stock options and 4,311 shares
issued to directors, employees and consultants subsequent to
September 30, 1999;
- 4,437,038 shares of Class A common stock reserved for future issuance
subsequent to September 30, 1999 under our 1999 stock incentive plan and
our 1999 employee stock purchase plan;
- 5,809,388 shares of Class B common stock issuable upon conversion of two
subordinated zero coupon convertible notes subsequent to September 30,
1999 held by affiliates of NBC;
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- 244,004 shares of Class A common stock issuable upon the exercise of a
warrant held by ValueVision International, Inc. at an exercise price of
$40.893 per share;
- 24,550,708 shares of Class B common stock convertible into
24,550,708 shares of Class A common stock subsequent to September 30, 1999
at the discretion of NBC and its affiliates; or
- Class A common stock issuable upon the closing of potential acquisitions
valued at approximately $234 million, which if consummated at the offering
price of $81.375 per share, would result in the issuance of approximately
2,875,576 additional shares. There is no guarantee that these acquisitions
will occur and the actual number of shares issuable, if any, will not be
determined until the closing of such acquisitions.
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DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
approximately $288.2 million, or $10.780 per share of Class A common stock. Pro
forma net tangible book value per share represents the amount of tangible assets
less total liabilities, divided by the total number of shares of Class A common
stock outstanding.
Dilution in pro forma net tangible book value per share represents the
difference between the amount per share paid by purchasers of Class A common
stock in this offering and the adjusted pro forma net tangible book value per
share of our Class A common stock immediately after the offering. After giving
effect to our sale of 3,650,000 shares of Class A common stock in this offering,
at a public offering price of $81.375 per share, and after deducting the
underwriting discounts and estimated offering expenses payable by us, our
adjusted pro forma net tangible book value as of September 30, 1999 would have
been approximately $568.3 million, or $18.700 per share. This represents an
immediate increase in adjusted pro forma net tangible book value of $7.920 per
share to existing stockholders and an immediate dilution in as adjusted pro
forma net tangible book value of $62.700 per share to purchasers of Class A
common stock in this offering. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Public offering price per share......................... $ 81.375
Pro forma net tangible book value per share as of
September 30, 1999.................................... $ 10.780
Increase in net tangible book value attributable to new
investors............................................. 7.920
---------
As adjusted pro forma net tangible book value per share
after the offering.................................... 18.700
---------
Dilution per share to new investors..................... $ 62.675
=========
</TABLE>
The following table sets forth, on a pro forma basis, as of September 30,
1999:
- the number of shares of Class A common stock purchased from us;
- the total consideration paid to us for Class A common stock;
- the average price per share paid by existing Class A common stockholders;
- the price per share paid by existing Class A common stockholders; and
- the price per share paid by new investors at a public offering price of
$81.375 per share, before deducting the underwriting discounts and
offering expenses payable by us.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------- ----------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
-------------- --------- ------------------ --------- --------------
<S> <C> <C> <C> <C> <C>
Existing Class A common stockholders... 26,746,708 87.99% $ 817,358,000 73.35% $ 30.560
New investors.......................... 3,650,000 12.01% $ 297,018,750 26.65% $ 81.375
-------------- --------- ------------------ ---------
Total................................ 30,396,708 100.00% $ 1,114,376,750 100.00%
============== ========= ================== =========
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to 4,040,000, or 13% of the total
shares of Class A common stock outstanding after this offering.
34
<PAGE>
The information in the above table does not include the following:
- 6,548,329 shares of Class A common stock issuable upon exercise of options
outstanding at September 30, 1999, with a weighted average exercise price
of $21.53 per share;
- 3,155,002 shares of Class A common stock issuable upon exercise of options
granted subsequent to September 30, 1999 with a weighted average exercise
price of $61.38 per share;
- 924,526 shares issued upon exercise of stock options and 4,311 shares
issued to directors, employees and consultants subsequent to September 30,
1999;
- 4,437,038 shares of Class A common stock reserved for future issuance
subsequent to September 30, 1999 under our 1999 stock incentive plan and
our 1999 employee stock purchase plan;
- 5,809,388 shares of Class B common stock issuable upon conversion of two
subordinated zero coupon convertible notes subsequent to September 30,
1999 held by affiliates of NBC;
- 244,004 shares of Class A common stock issuable upon the exercise of a
warrant held by ValueVision International, Inc. at an exercise price of
$40.893 per share;
- 24,550,708 shares of Class B common stock convertible into
24,550,708 shares of Class A common stock subsequent to September 30, 1999
at the discretion of NBC and its affiliates; or
- Class A common stock issuable upon the closing of potential acquisitions
valued at approximately $234 million, which if consummated at the offering
price of $81.375 per share, would result in the issuance of approximately
2,875,576 additional shares. There is no guarantee that these acquisitions
will occur and the actual number of shares issuable, if any, will not be
determined until the closing of such acquisitions.
To the extent these options and warrants are exercised or the notes are
converted, there will be further dilution to the new investors.
35
<PAGE>
NBCI
UNAUDITED SELECTED PRO FORMA CONDENSED COMBINED FINANCIAL DATA
The following unaudited selected pro forma condensed combined financial
information for NBCi gives effect to the transactions among Xoom.com, NBC and
the NBC Multimedia Division (which consists of NBC.com, NBC-IN.com and
VideoSeeker), CNET and Snap. The following unaudited pro forma condensed
combined financial statements reflect the combination of the following:
- Xoom.com pro forma (represents pro forma combination of Xoom.com,
Paralogic Corporation, Global Bridges Technologies, Inc., PageCount, Inc.,
MightyMail Networks Inc., Paralogic Software Corporation and LiquidMarket,
Inc.);
- NBC.com;
- NBC-IN.com;
- VideoSeeker;
- CNET's ownership interest in Snap;
- NBC's ownership interest in Snap; and
- 10% equity interest in CNBC.com LLC.
The total purchase costs of the transactions have been calculated with
Xoom.com treated as the accounting acquiror and give effect to the purchase of
the NBC Multimedia Division and to NBCi's acquisition of CNET's and NBC's
ownership interests in Snap. The historical financial information has been
derived from the respective historical and/or pro forma financial statements of
Xoom.com, Snap, and the NBC Multimedia Division, and should be read in
conjunction with those financial statements and the related notes contained in
this prospectus.
The unaudited pro forma condensed combined balance sheet as of
September 30, 1999 has been prepared assuming the transactions took place as of
that date and includes the allocation of the total purchase consideration to the
fair values of the assets and liabilities of Snap and the NBC Multimedia
Division, based on a preliminary valuation.
The unaudited pro forma condensed combined statements of operations combine
the Xoom.com pro forma historical statements of operations and the historical
statements of operations of Snap and the NBC Multimedia Division for the year
ended December 31, 1998 and the nine months ended September 30, 1998 and 1999
and give effect to the transactions, including the amortization of goodwill and
other intangible assets, as if they had occurred at the beginning of each period
presented.
The unaudited pro forma condensed combined information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the transaction had
been consummated at the dates indicated, nor is it necessarily indicative of
future operating results or financial position of the combined companies and
should not be construed as representative of these amounts for any future dates
or periods.
As set forth in the pro forma condensed combined statements of operations,
NBCi experienced net losses for the nine months ended September 30, 1998 and
1999 and the year ended December 31, 1998. We believe that we have the financial
resources needed to meet the presently anticipated business requirements of
NBCi, including capital expenditure and strategic operating programs, for at
least the next 12 months. Thereafter, if cash generated by operations is
insufficient to satisfy our liquidity requirements, we may need to sell
additional equity or debt securities or obtain additional credit facilities. The
sale of additional equity or convertible debt securities may result in
additional dilution to our stockholders. We may not be able to raise any such
capital on terms acceptable to us or at all.
36
<PAGE>
The following table presents unaudited pro forma condensed combined
statements of operations data for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
------------ -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1998 1999
------------ ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Pro Forma Condensed Combined Statement of Operations
Data:
Advertising revenue...................................... $ 21,958 $ 12,000 $ 45,308
E-commerce revenue....................................... 6,174 3,912 10,376
--------- --------- ---------
Total net revenue...................................... 28,132 15,912 55,684
Cost of advertising revenue.............................. 13,148 9,389 11,647
Cost of e-commerce revenue............................... 3,584 2,000 7,462
--------- --------- ---------
Cost of net revenue.................................... 16,732 11,389 19,109
--------- --------- ---------
Gross profit............................................. 11,400 4,523 36,575
Operating expenses:
Operating and development.............................. 11,540 7,701 15,981
Sales and marketing.................................... 19,631 10,652 35,978
General and administrative............................. 14,538 9,614 19,625
Purchased in-process research and development.......... 790 790 2,603
Amortization of deferred compensation.................. 1,765 1,248 6,648
Amortization of intangible assets...................... 271,281 203,457 204,245
Promotion and advertising provided by NBC.............. 14,060 3,484 32,950
--------- --------- ---------
Total operating expenses................................. 333,605 236,946 318,030
--------- --------- ---------
Loss from operations..................................... (322,205) (232,423) (281,455)
Other income (expense):
Interest and other income.............................. 16,985 13,065 19,218
Interest and other expense............................. (15,218) (11,218) (12,417)
Interest expense related to warrant.................... (1,494) -- --
--------- --------- ---------
Net loss................................................. $(321,932) $(230,576) $(274,654)
========= ========= =========
Net loss per share--basic and diluted.................... $ (7.74) $ (5.64) $ (5.77)
========= ========= =========
Number of shares used in per share calcuation--basic and
diluted................................................ 41,595 40,888 47,616
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF
SEPTEMBER 30,
1999
--------------
(IN THOUSANDS)
<S> <C>
Pro Forma Condensed Combined Balance Sheet Data:
Cash, cash equivalents and short-term investments........... $ 156,167
Notes receivable from NBC and it's affiliates, current and
non-current ($78,288 current)............................. 340,000
Working capital............................................. 198,773
Total assets................................................ 2,464,258
Long-term obligations, less current portion................. 2,836
Amounts due to NBC and its affiliates, current and
non-current ($101 current)................................ 370,101
Amounts due to CNET (current)............................... 1,788
Total stockholders' equity.................................. 2,038,108
</TABLE>
37
<PAGE>
NBC INTERNET, INC.'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF
PRO FORMA FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We are an integrated media company that combines portal, community and
e-commerce services designed to deliver a comprehensive, next-generation online
experience to a global audience. We were organized in May 1999. As a result of
transactions that occurred on November 29 and 30 of 1999, Xoom.com and Snap
became our wholly owned subsidiaries, and we became the owners of the businesses
related to NBC.com, NBC-IN.com and VideoSeeker.com and a 10% ownership interest
in CNBC.com, LLC. On November 29, 1999 the transactions contemplated by the
merger agreement were consummated. Under the merger agreement, (1) Xenon 3, our
wholly-owned subsidiary, was merged with and into Xoom.com and (2) CNET
exchanged its ownership interest in Snap, all in exchange for shares of our
Class A common stock. On November 30, 1999 the transactions contemplated by the
contribution agreement were consummated. Under the contribution agreement,
(1) Neon Media Corporation, the owner of the businesses related to NBC.com,
NBC-IN.com and a 10% ownership interest in CNBC.com, was merged with and into us
in exchange for shares of our Class B common stock issued to NBC Multimedia;
(2) NBC Multimedia received shares of our Class B common stock in exchange for
its ownership interests in Snap; (3) NBC Multimedia transferred the business
related to VideoSeeker.com to us in exchange for our $39,477,953 subordinated
zero coupon convertible note due 2006; and (4) GE Investments Subsidiary
purchased our $447,416,805 subordinated zero coupon convertible note due 2006 in
exchange for an assignment of a $340 million note issued by NBC. The total
purchase costs of the transactions have been calculated with Xoom.com treated as
the accounting acquiror and give effect to the purchase of the Internet
properties contributed by NBC and to NBCi's acquisition of CNET's and NBC's
ownership interests in Snap.
We have not achieved profitability on a quarterly or annual basis to date,
and anticipate that we will incur net losses for the foreseeable future. The
extent of these losses will depend, in part, on the amount and rates of growth
in our net revenue from advertising and e-commerce. We expect our operating
expenses to increase significantly, especially in the areas of sales and
marketing and brand promotion. As a result, we will need to increase our
quarterly net revenue to achieve profitability. We believe that pro-forma
period-to-period comparisons of our operating results are not meaningful and
that you should not rely upon the results for any period as an indication of
future performance. Our business, results of operations and financial condition
will be materially and adversely affected if:
- net revenue does not grow at anticipated rates;
- increases in operating expenses are not offset by commensurate increases
in net revenue; or
- we are unable to adjust operating expense levels as a result of lower net
revenues.
Our operating losses might increase in the future, and we cannot guarantee
that we will ever achieve or sustain profitability.
We intend to continue making acquisitions to increase online reach and
membership and to seek additional strategic alliances with content and
distribution partners, including alliances that create co-branded sites through
which we market our services. Acquisitions carry numerous risks and
uncertainties, including:
- difficulties in integrating operations, personnel, technologies, products
and the information systems of the acquired companies;
- diversion of management's attention from other business concerns;
38
<PAGE>
- risks of entering geographic and business markets in which we have little
or no prior experience; and
- potential loss of key employees of acquired entities.
We cannot guarantee that we will be able to successfully integrate any
businesses, products, technologies or personnel that might be acquired in the
future. A failure to integrate acquired entities or assets successfully could
seriously harm our business, results of operations and financial condition. In
addition, we cannot guarantee that we will be successful in identifying and
closing transactions with potential acquisition candidates.
RECENT EVENTS
ALLBUSINESS.COM On February 1, 2000 we entered into an agreement to acquire
Allbusiness.com, a privately held company with more than 80 employees active in
the business-to-business field. The transaction will be a stock for stock merger
to be valued at closing at appoximately $225 million and is expected to be
accounted for as a purchase. In addition, we will assume the outstanding options
of Allbusiness.com. The transaction is expected to close by the end of the first
quarter and is subject to customary closing conditions. Allbusiness.com's Web
site is designed to offer practical solutions to the everyday challenges of
starting, managing and growing a business and provides entrepreneurs and small
businesses with a single point of access for resources that enhance operations,
solve problems and save money. We believe Allbusiness.com will provide a broad
platform from which we can develop and integrate our business-to-business
services and products.
VALUEVISION INTERNATIONAL, INC. On September 13, 1999, Xoom.com and Snap
entered into a strategic alliance with ValueVision International, Inc. whereby
the parties entered into re-branding and electronic commerce agreements,
including television home shopping, Internet shopping and direct e-commerce
initiatives. Under the terms of the agreements, Snap granted ValueVision a
ten-year, exclusive license to use Snap's "SnapTV" trademark for the purpose of
operating a television home shopping service and a Web site at www.snaptv.com in
exchange for a royalty of 2.0% of gross revenues received from Internet users in
connection with commerce opportunities on the SnapTV Web site. Xoom.com will
become the exclusive direct e-commerce partner for SnapTV and direct online
shopping offers will include Xoom.com products and services, as well as SnapTV
merchandise. ValueVision and Xoom.com will share revenues from all such
initiatives. In addition, Snap has the exclusive right to sell all Internet
advertising on SnapTV.com and will retain 50.0% of the revenues generated from
such advertising. As part of the agreements, ValueVision and Xoom.com entered
into a warrant purchase agreement whereby Xoom.com agreed to purchase a warrant
for 404,760 shares of ValueVision common stock at an exercise price of $24.706,
and ValueVision agreed to purchase a warrant for 244,004 shares of Xoom.com
common stock at an exercise price of $40.893 per share. The warrants may be
exercised at any time after the closing of the contribution agreement through
September 12, 2004. These rights and obligations of Xoom.com and Snap were
assigned to and assumed by us on November 30, 1999.
TELOCITY, INC. On December 13, 1999, we entered into a 15 year operating
agreement with Telocity, Inc. to bring "plug and play" broadband Internet
services to home residences. We will develop with Telocity a co-branded
nationwide service to offer users high-speed Internet access and multimedia
content and services. We entered into the agreement as a joint venture with NBC,
GE Equity, and ValueVision, in which the companies collectively agreed to make a
$70.5 million investment in Telocity in return for an aggregate ownership stake
of 19.5%. We received an ownership stake in Telocity of approximately 6.8% and a
seat on Telocity's board. We made a $28.0 million investment in Telocity
consisting of $10.0 million in cash and $18.0 million in online promotions. NBCi
and Telocity will share revenues from the co-branded initiatives. We also
received
39
<PAGE>
a warrant to purchase 1,039,122 shares of Telocity Series C preferred stock at
an exercise price of $5.24 per share. The warrant has a term of five years.
CLEAR CHANNEL BROADCASTING, INC. On June 30, 1999 we entered into a two
year agreement with Clear Channel Broadcasting, Inc. a globally diversified
media and outdoor advertising company, which operates, or is affiliated with
over 500 radio stations worldwide. The agreement provides that Xoom.com will be
the exclusive provider of free Web site space, chat rooms and Web e-mail on the
Web sites associated with 474 of the over 500 radio stations affiliated with
Clear Channel and that Snap will be the premier provider of search and directory
services on such Clear Channel Web sites. Xoom.com also has the exclusive right
to send direct advertising and marketing to members associated with the services
provided by Xoom.com on the Clear Channel Web sites. We have agreed to purchase
at least $3.5 million per year of advertising on the Clear Channel radio network
and billboards and paid Clear Channel a sponsorship fee. In addition we share
advertising revenue with Clear Channel, the amount of which is dependent upon
the type of service involved.
RESULTS OF OPERATIONS
The following table presents pro forma condensed combined statement of
operations data of NBCi for the periods indicated as a percentage of total net
revenue.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1999
-------------- --------------
<S> <C> <C>
Advertising revenue.............................. 75.4% 81.4%
E-commerce revenue............................... 24.6 18.6
---------- ----------
Total net revenue............................ 100.0 100.0
Cost of advertising revenue...................... 59.0 20.9
Cost of e-commerce revenue....................... 12.6 13.4
---------- ----------
Cost of net revenue.......................... 71.6 34.3
---------- ----------
Gross profit..................................... 28.4 65.7
Operating expenses:
Operating and development...................... 48.4 28.7
Sales and marketing............................ 67.0 64.6
General and administrative..................... 60.4 35.2
Purchased in-process research and development.. 5.0 4.7
Amortization of deferred compensation.......... 7.8 11.9
Amortization of intangible assets.............. 1,278.6 366.8
Promotion and advertising provided by NBC...... 21.9 59.2
---------- ----------
Total operating expenses......................... 1,489.1 571.1
---------- ----------
Loss from operations............................. (1,460.7) (505.4)
Other income (expense):
Interest income................................ 82.1 34.5
Interest expense............................... (70.5) (22.3)
---------- ----------
Net loss......................................... (1,449.1)% (493.2)%
========== ==========
</TABLE>
NET REVENUE. Total pro forma net revenue for the nine months ended
September 30, 1999 was $55.7 million, an increase of $39.8 million over pro
forma net revenue of $15.9 million in the same period ended September 30, 1998.
This increase was primarily due to the following factors: (A) an increase in
traffic directed to our Web sites, which resulted in increased attractiveness to
advertisers and strategic partnership growth; (B) an increase in the number and
frequency of e-mail offerings and broader product offerings which resulted in an
increase in product sales through
40
<PAGE>
e-commerce; (C) an increase in license fee revenue from additional content and
service providers; and (D) an increase in equity instruments received for
placement of their content or services on our Web sites.
ADVERTISING REVENUE. Pro forma advertising revenue increased to
$45.3 million in the nine months ended September 30, 1999 from $12.0 million in
the nine months ended September 30, 1998. The increase in pro forma advertising
revenue is primarily a result of an increase in membership, increased site
traffic, and the expansion of our advertising sales force. The increase in
traffic can primarily be attributed to the promotion on NBC's television network
and to co-branding agreements with our Web sites, as well as other distribution
partnerships.
The percentage of total pro forma net revenue attributable to advertising
revenue increased to 81.4% in the nine months ended September 30, 1999 from
75.4% in the same period ended September 30, 1998. This increase was primarily
due to the increase in our membership base, increased site traffic, and the
expansion of our advertising sales force, which resulted in a higher volume of
advertising customers.
E-COMMERCE REVENUE. Pro forma e-commerce revenue consists of on-line
product sales (inclusive of shipping and handling fees), license fee revenue as
well as fees paid to us for co-branded e-mail-based product offers and for lead
generation fees. Pro forma e-commerce revenue increased to $10.4 million in the
nine months ended September 30, 1999 from $3.9 million in the nine months ended
September 30, 1998. The increase in pro forma e-commerce revenue was primarily
due to the expansion of our membership base combined with an increase in the
number and frequency of e-mail offerings, which resulted in an increase in
product sales, as well as an expansion of the breadth of products offered.
The percentage of total pro forma net revenue attributable to pro forma
e-commerce revenue decreased to 18.6% in the nine months ended September 30,
1999 from 24.6% in the same period ended September 30, 1998. This decrease was
due to the fact that pro forma advertising revenue grew at a more rapid rate
than pro forma e-commerce revenue in the nine months ended September 30, 1999 as
compared to the nine months ended September 30, 1998.
COST OF NET REVENUE. Pro forma cost of net revenue increased to
$19.1 million in the nine months ended September 30, 1999 from $11.4 million in
the nine months ended September 30, 1998, as a result of the increase in pro
forma net revenue. As a percentage of pro forma net revenue, pro forma cost of
net revenue decreased to 34.3% of pro forma net revenue in the nine months ended
September 30, 1999 from 71.6% of pro forma net revenue in the same period ended
September 30, 1998 due to net revenues growing at a higher rate than cost of net
revenues.
COST OF ADVERTISING REVENUE. Pro forma cost of advertising revenue consists
of costs incurred to create and produce the content of our Web sites as well as
the technical hosting and bandwidth charges associated with transmitting such
content over the Internet. Pro forma cost of advertising revenue increased to
$11.6 million in the nine months ended September 30, 1999 from $9.4 million in
the same period ended September 30, 1998. This increase was primarily a result
of an increase in content license fees, costs incurred to produce
VideoSeeker.com and an increase in demand for advertising on co-branded sites.
As a percentage of pro forma net revenue, pro forma cost of advertising
revenue decreased to 20.9% of pro forma net revenue in the nine months ended
September 30, 1999 from 59.0% of pro forma net revenue in the same period ended
September 30, 1998 due to net revenues growing at a higher rate than costs of
advertising revenues.
COST OF E-COMMERCE REVENUE. Pro forma cost of e-commerce revenue consists
primarily of the costs of merchandise sold to customers, credit card
commissions, product fulfillment and outbound shipping and handling costs. Pro
forma cost of e-commerce was $7.5 million for the nine months ended
September 30, 1999 and it was $2.0 million for the same period ended
41
<PAGE>
September 30, 1998. The increase was primarily attributable to the growth in
e-commerce sales and the mix of products sold.
As a percentage of pro forma net revenue, pro forma cost of e-commerce
revenue increased to 13.4% of pro forma net revenue in the nine months ended
September 30, 1999 from 12.6% of pro forma net revenue in the same period ended
September 30, 1998. This increase was primarily attributable to the fact that in
1999, we broadened our product offerings. Our new product offerings included
items with higher costs than in the prior period.
OPERATING AND DEVELOPMENT EXPENSES. Pro forma operating and development
expenses consist primarily of payroll and related expenses for development and
network operations personnel and consultants, costs related to modifications,
enhancements and new development operations to enhance our Web sites. Pro forma
operating and development expenses increased to $16.0 million in the nine months
ended September 30, 1999 from $7.7 million in the same period ended
September 30, 1998. The increase is primarily due to higher payroll and related
expenses caused by additional headcount. We believe operating and development
expenses will increase significantly in the future as management initiates new
product features and makes significant investments in its Web sites to remain
competitive.
Pro forma operating and development expenses decreased as a percentage of
pro forma net revenue to 28.7% in the nine months ended September 30, 1999 from
48.4% in the same period ended September 30, 1998. This decrease was due to net
revenues growing at a higher rate than spending for operations and development.
SALES AND MARKETING EXPENSES. Pro forma sales and marketing expenses
consist of payroll and related expenses for personnel engaged in sales,
marketing and customer support, as well as advertising, promotional and traffic
distribution expenditures. Pro forma sales and marketing increased to
$36.0 million in the nine months ended September 30, 1999 from $10.7 million in
the same period ended September 30, 1998. This increase was due to increased
personnel and related expenses required to implement our sales and marketing
strategy, an increase in distribution costs, as well as increased public
relations and other promotional and advertising expenses. We believe sales and
marketing expenses will increase significantly in future periods as additional
personnel are hired and as a result of increased branding, marketing and
promotional spending.
Pro forma sales and marketing expenses decreased as a percentage of pro
forma net revenue to 64.6% in the nine months ended September 30, 1999 from
67.0% in the same period ended September 30, 1998. This decrease was due to net
revenues growing at a higher rate than spending for sales and marketing.
GENERAL AND ADMINISTRATIVE EXPENSES. Pro forma general and administrative
expenses consist primarily of payroll and related expenses for general corporate
functions, including finance, legal, accounting, business development, human
resources, investor relations and administration, as well as outside legal and
accounting fees, director fees and insurance and facilities-related expenses.
Pro forma general and administrative expenses increased to $19.6 million in the
nine months ended September 30, 1999 from $9.6 million in the same period ended
September 30, 1998. This increase was primarily due to increases in the number
of general and administrative personnel, as well as increases in professional
services and facilities-related expenses to support the growth of our
operations. We believe general and administrative expenses will increase
significantly in future periods as a result of staff expansion and increased
operational costs associated with the growth of our business.
Pro forma general and administrative expenses decreased as a percentage of
pro forma net revenue to 35.2% in the nine months ended September 30, 1999 from
60.4% in the same period ended September 30, 1998. This decrease was due to net
revenues growing at a higher rate than spending for general and administrative.
42
<PAGE>
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. For the nine months ended
September 30, 1999 we recognized pro forma cost of purchased in-process research
and development of $2.6 million in connection with the acquisitions of
MightyMail Networks, Inc. and Paralogic Software Corporation, and for the same
period ended September 30, 1998 we recognized $790,000 in connection with the
acquisition of Paralogic Corporation, the purchase of certain assets of
Revolutionary Software, Inc. and the acquisition of substantially all of the
assets of Pagecount, Inc.
ACQUISITIONS DURING THE NINE MONTHS ENDED SEPTEMBER 30, 1999
MIGHTYMAIL NETWORKS, INC. On May 3, 1999, we acquired 100% of the
outstanding shares of MightyMail Networks, Inc., a developer of an enhanced
e-mail product that enables customization of e-mail according to user
preferences. The purchase consideration consisted of 268,761 shares of
Xoom.com's common stock with an estimated fair value of $71.10 per share, the
assumption of options to acquire 9,061 shares of common stock at a price per
share of $70.47 and the assumption of options to acquire 12,121 shares of common
stock at a price per share of $55.91 and acquisition costs of approximately
$300,000. In addition, 67,186 shares of Xoom.com's common stock were placed into
an escrow account. In connection with the MightyMail Networks acquisition, we
recorded a $1.1 million charge to purchased in-process research and development.
PARALOGIC SOFTWARE CORPORATION. On June 16, 1999, we acquired 100% of the
outstanding shares of Paralogic Software Corporation, a provider of Java based
community products and services, such as customizable chat rooms, discussion
boards, guestbooks and event calendars. The purchase consideration consisted of
654,018 shares of common stock at $47.13 per share, the assumption of options to
acquire 82,733 shares of common stock at a price per share of $46.67 and the
assumption of options to acquire 12,001 shares of common stock at a price per
share of $33.05 and acquisition costs of approximately $315,000. In connection
with the Paralogic Software Corporation acquisition, we recorded a $1.5 million
charge to purchased in-process research and development.
ACQUISITIONS DURING THE NINE MONTHS ENDED SEPTEMBER 30, 1998
PARALOGIC CORPORATION. On March 10, 1998, we acquired 100% of the
outstanding shares of Paralogic Corporation. Paralogic Corporation provides free
communication between members via a chat Web site network. The purchase
consideration was $3.0 million consisting of 682,410 shares of common stock with
an estimated fair value of $2.31 per share, $1.4 million of debt and $62,000 of
acquisition costs. Contingent consideration consisted of an additional $860,000,
included in debt above, which was to be paid if certain performance criteria
were met. In connection with the Paralogic Corporation acquisition, we recorded
a $330,000 charge to purchased in-process research and development.
REVOLUTIONARY SOFTWARE, INC. On June 11, 1998, we purchased specific
technology of Revolutionary Software, Inc. Revolutionary Software is the
developer of the Sitemail technology and had licensed Sitemail to Global Bridges
Technology, Inc. who was also acquired by us on June 11, 1998. The purchase
consideration for Revolutionary Software was $701,000, consisting of 128,052
shares of common stock with an estimated fair value of $3.33 per share, $12,000
of cash and a note payable of $263,000 with fixed payment terms. Revolutionary
Software may earn up to an additional 34,608 shares of common stock upon the
completion of specific performance targets. In connection with the acquisition
of specific technology of Revolutionary Software, Inc., we recorded a $330,000
charge to purchased in-process research and development.
PAGECOUNT, INC. On July 24, 1998, we acquired substantially all of the
assets of Pagecount, Inc. The consideration was $1.5 million, consisting of
$200,000 of cash, a note payable of $1.2 million with fixed payment terms and
acquisition costs of approximately $60,000. In
43
<PAGE>
connection with the acquisition, we recorded a $130,000 charge to purchased
in-process research and development.
AMORTIZATION OF DEFERRED COMPENSATION. Pro forma amortization of deferred
compensation reflects the amortization of stock compensation charges resulting
from employee stock option grants. Deferred compensation charges account for the
difference between the exercise price and the deemed fair value of specific
stock options granted to NBCi employees. We recorded pro forma amortization of
deferred compensation of $6.6 million in the nine months ended September 30,
1999 and $1.2 million for the same period ended September 30, 1998. We cannot
guarantee that we will not accrue additional charges, which could seriously harm
our business, results of operations and financial condition.
AMORTIZATION OF INTANGIBLE ASSETS. Pro forma amortization of intangible
assets totaled $204.2 million for the nine months ended September 30, 1999 and
was $203.5 million for the same period ended September 30, 1998. The pro forma
amortization of intangible assets for the nine months ended September 30, 1999
and 1998 was due to the acquisitions of Paralogic Corporation, Global Bridges
Technologies, Inc., Focused Presence, Inc., MightyMail Networks, Inc., Net
Floppy, Inc., Paralogic Software Corporation, LiquidMarket, Inc., Private
One, Inc., the purchase of substantially all of the assets of Pagecount, Inc.
and the purchase of specific assets of Revolutionary Software, Inc., amortized
over periods ranging from 24 to 48 months. The pro forma amortization of
intangible assets for the nine months ended September 30, 1999 and 1998 also
included amortization of intangible assets related to the purchase of Snap and
NBC Multimedia, amortized over periods ranging from 36 to 84 months.
PROMOTION AND ADVERTISING PROVIDED BY NBC. We have recorded $33.0 million
in pro forma promotion and advertising expense in the nine months ended
September 30, 1999, and $3.5 million in pro forma promotion and advertising
expense in the same period ended September 30, 1998. The promotion and
advertising services provided by NBC have been recorded as capital contributions
based on average cost per thousand impressions value for commercial airtime
during the period the services were provided. The increase is due to higher
volume of promotions and advertising provided by NBC during the nine months
ended September 30, 1999, as compared to nine months ended September 30, 1998.
INTEREST INCOME. Pro forma interest income represents interest we earned on
our cash investments as well as on a note receivable from NBC. We earned
$19.2 million of pro forma interest income in the nine months ended
September 30, 1999, and $13.1 million in the same period ended September 30,
1998. The increase in pro forma interest income was primarily due to the
increased cash balances available to invest as a result of funds raised in
Xoom.com's initial public offering in December 1998 and its secondary offering
in April 1999 as well as proceeds from the issuance of 960,028 shares of
Xoom.com common stock to NBC in July 1999.
INTEREST EXPENSE. Pro forma interest expense represents interest charges
related to notes payable, including two notes payable to NBC, our revolving line
of credit and capital leases. We incurred $12.4 million in pro forma interest
expense in the nine months ended September 30, 1999 and $11.2 million in the
same period ended September 30, 1998. The increase in pro forma interest expense
was primarily due to carrying a higher balance on our revolving line of credit
during the nine months ended September 30, 1999 than the nine months ended
September 30, 1998.
NET LOSS. Our pro forma net loss for the nine months ended September 30,
1999 was $274.7 million and it was $230.6 million for the same period ended
September 30, 1998. The $44.1 million increase was primarily attributable to an
increase of $7.7 million in cost of net revenue, an increase of $8.3 million in
pro forma operating and development expenses, an increase of $25.3 million in
pro forma sales and marketing expenses, an increase of $10.0 million in pro
forma general and administrative expenses and an increase of $29.5 million in
non-cash expenses for
44
<PAGE>
promotion and advertising provided by NBC, offset by an increase in pro forma
net revenue of $39.8 million.
LIQUIDITY AND CAPITAL RESOURCES
We have financed our operations primarily from funds Xoom.com raised in its
initial public offering in December 1998, its secondary offering in April 1999
and proceeds from the issuance of 960,028 shares of Xoom.com common stock to NBC
in July 1999.
We had pro forma cash, cash equivalents and short-term investments of
$156.2 million as of September 30, 1999. We regularly invest excess funds in
short-term money market funds, government securities and commercial paper.
Pro forma cash and cash equivalents and marketable securities increased to
$156.2 million as of September 30, 1999 from $100.6 million as of December 31,
1998. This increase was primarily due to proceeds from Xoom.com's secondary
offering in April, 1999 of $166.6 million, an increase in pro forma accounts
payable and accrued compensation and related expenses of $12.0 million, an
increase in pro forma deferred revenue of $6.4 million, and an increase in
related party payables of $1.8 million offset by an increase in pro forma
current assets of $7.5 million, an increase in pro forma fixed assets of
$10.6 million, an increase in pro forma long-term investments of $63.0 million,
an increase in pro forma other long-term assets of $10.6 million, a decrease in
pro forma other accrued liabilities of $2.1 million, a decrease in pro forma
notes payable of $1.2 million and pro forma cash operating expenses of
$35.0 million in the nine months ending September 30, 1999.
As set forth in the pro forma condensed combined statements of operations,
we experienced net losses for the nine months ended September 30, 1999 and 1998.
We believe that we have the financial resources needed to meet our presently
anticipated business requirements, including capital expenditure and strategic
operating programs, for at least the next 12 months. Thereafter, if cash
generated by operations is insufficient to satisfy our liquidity requirements,
we may need to sell additional equity or debt securities or obtain additional
credit facilities. The sale of additional equity or convertible debt securities
may result in additional dilution to our stockholders. We may not be able to
raise any such capital on terms acceptable to us or at all.
DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is confined principally to our short-term
available-for-sale securities, which have short maturities and, therefore,
minimal and immaterial market risk. We occasionally invest in equity securities
of privately held companies for business and strategic purposes. For investments
in which no public market exists, our policy is to regularly review the
operating performance, recent financing transactions and cash flow forecasts for
such companies in assessing the net realizable values of the securities of these
companies. We expect to identify and record impairment losses on long-lived
assets when events and circumstances indicate that such assets might be
impaired.
YEAR 2000
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. As a result, software that
records only the last two digits of the calendar year may not be able to
distinguish whether "00" means 1900 or 2000. This may result in software
failures or the creation of erroneous results. In addition, computer programs
may fail to recognize February 29, 2000 as a leap year date as a result of an
exception to the calculation of leap years that will occur in the year 2000 and
otherwise occurs only once every 400 years. To date we have not experienced any
significant Year 2000 problems in our internal technology systems or with the
vendors of systems we believe to be critical to our business. In addition, we
believe that it is unlikely we will experience any significant Year 2000
problems in the future.
45
<PAGE>
However, there can be no assurance that residual Year 2000 problems will not
materially adversely affect our results of operations, cash flows or financial
position in a particular period.
RECENT ACCOUNTING PRONOUNCEMENTS
The FASB recently issued SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including derivative instruments embedded
in other contracts (collectively referred to as derivatives), and for hedging
activities. It requires that an entity recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. We must adopt SFAS No. 133 by January 1, 2001.
Management does not believe the adoption of SFAS No. 133 will have a material
adverse effect on our financial position or operations.
SUBSEQUENT EVENTS
On November 30, 1999, Xoom.com acquired Snap and Internet properties
contributed by NBC through a series of transactions resulting in the creation of
NBCi. In connection with the transaction, we recorded non-cash, non-recurring
charges of $17.8 million in the fourth quarter of 1999 related to the
termination of the employment of Xoom.com's chief executive officer, and the
write-off of specific leasehold improvements related to facility leases that
will be abandoned as a result of the merger transactions.
RECENT OPERATING RESULTS
On January 27, 2000, we announced our unaudited results of operations for
the year ended December 31, 1999. Under generally accepted accounting
principles, our financial results are reported treating Xoom.com as the
accounting acquiror in the purchase business combination that resulted in the
formation of our company. Under this accounting treatment, the financial results
of Snap and the NBC Multimedia Division (which consists of NBC.com, NBC-IN.com,
and VideoSeeker.com) are excluded prior to November 30, 1999. On this basis, our
unaudited revenues were approximately $35.6 million for the year ended
December 31, 1999, which compares to revenues of approximately $8.3 million for
the year ended December 31, 1998. Our net loss was approximately $86.8 million
and our net loss per basic and diluted share was $4.26 for the year ended
December 31, 1999, which compares to a net loss of approximately $10.8 million
and a net loss per basic and diluted share of $1.37 for the year ended
December 31, 1998.
On a pro forma combined basis, as defined by SEC rules and regulations, our
statement of operations as described above is combined with the historical
statements of operations of (i) Snap! LLC; (ii) the businesses related to
NBC.com, NBC-IN.com, and VideoSeeker.com; (iii) MightyMail Networks, Inc.;
(iv) Paralogic Software Corporation; and (v) LiquidMarket, Inc. for the year
ended December 31, 1999, giving effect to these acquisitions, including the
amortization of goodwill and intangible assets, as if they had occurred on
January 1, 1999. On this basis, our pro forma revenues were approximately
$101.5 million, our pro forma net loss was approximately $397.0 million, and our
pro forma net loss per basic and diluted share was $8.17 for the year ended
December 31, 1999.
These financial results are preliminary, are subject to the completion of an
audit of our December 31, 1999 financial statements, and are not necessarily
indicative of the results to be expected for future periods.
46
<PAGE>
The following table presents our condensed combined balance sheet data as of
December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1999
-------------
(UNAUDITED)
<S> <C>
ASSETS
Current assets:
Cash, cash equivalents & marketable securities............ $ 166,011
Accounts receivable, net.................................. 17,223
Inventories............................................... 461
Note receivable from NBC, current portion................. 78,288
Other current assets...................................... 46,346
----------
Total current assets........................................ 308,329
Fixed assets, net........................................... 18,096
Intangible assets, net...................................... 1,759,473
Marketable securities, including restricted cash of
$8,990.................................................... 27,035
Long-term note receivable from NBC, less current portion.... 261,712
Other assets................................................ 119,451
----------
Total assets................................................ $2,494,096
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and other accrued liabilities............ $ 50,452
Notes payable, current portion............................ 155
Amounts due to related parties, current portion........... 41,792
Deferred revenue.......................................... 18,943
----------
Total current liabilities................................... 111,342
Convertible notes payable due to NBC and its affiliates... 370,000
Long-term obligations, less current portion............... 12,970
----------
Long-term liabilities....................................... 382,970
Stockholders' equity:
Common stock.............................................. 2,100,111
Accumulated other comprehensive income.................... 4,994
Deferred compensation..................................... (4,121)
Accumulated deficit....................................... (101,200)
----------
Total stockholders' equity.................................. 1,999,784
----------
Total liabilities and stockholders' equity.................. $2,494,096
==========
</TABLE>
47
<PAGE>
The following table presents our condensed combined statement of operations
data for the year ended December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1999
-------------
(UNAUDITED)
<S> <C>
Net revenue:
Advertising............................................... $ 19,953
E-commerce................................................ 15,628
--------
Total net revenue........................................... 35,581
Cost of net revenue:
Cost of advertising....................................... 6,296
Cost of e-commerce........................................ 10,504
--------
Total cost of net revenue................................... 16,800
Gross profit................................................ 18,781
Operating expenses:
Operating and development................................. 7,674
Sales and marketing....................................... 21,952
General and administrative................................ 11,482
Promotion and advertising provided by NBC................. 16,858
Amortization of deferred compensation..................... 962
Purchased in-process research and development............. 2,603
Amortization of intangible assets......................... 35,822
Non-recurring charges..................................... 17,801
--------
Total operating expenses.................................... 115,154
--------
Loss from operations........................................ (96,373)
Other income (expense):
Interest income........................................... 10,963
Interest expense.......................................... (1,421)
--------
Net loss.................................................... $(86,831)
========
Net loss per share--basic and diluted....................... $ (4.26)
========
Number of shares used in per share calcuation--basic and
diluted................................................... 20,386
========
</TABLE>
48
<PAGE>
The following unaudited selected pro forma condensed combined statement of
operations for NBCi gives effect to the transactions among Xoom.com, NBC and the
NBC Multimedia Division, which consists of NBC.com, NBC-IN.com and VideoSeeker,
CNET and Snap as well as the acquisitions of MightyMail Networks, Inc.,
Paralogic Software Corporation, and LiquidMarket, Inc. The following unaudited
pro forma condensed combined statement of operations reflects the combination of
the following:
- NBCi;
- NBC.com;
- NBC-IN.com;
- VideoSeeker;
- SNAP! LLC
- 10% equity interest in CNBC.com LLC.
- MightyMail Networks, Inc.
- Paralogic Software Corporation
- LiquidMarket, Inc.
The total purchase costs of the NBCi merger have been calculated with
Xoom.com treated as the accounting acquiror and give effect to the purchase of
the NBC Multimedia Division and to NBCi's acquisition of CNET's and NBC's
ownership interests in Snap.
The unaudited pro forma condensed combined statement of operations combines
the Xoom.com pro forma historical statements of operations and the historical
statements of operations of Snap, NBC Multimedia Division, MightyMail Networks,
Inc., Paralogic Software Corporation and LiquidMarket, Inc., for the year ended
December 31, 1999 and gives effect to the transactions, including the
amortization of goodwill and other intangible assets, as if they had occurred on
January 1, 1999.
The unaudited pro forma condensed combined information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results that would have occurred if the transaction had been consummated at the
dates indicated, nor is it necessarily indicative of future operating results of
the combined companies and should not be construed as representative of these
amounts for any future dates or periods.
49
<PAGE>
The following table presents our pro forma condensed combined statement of
operations data for the year ended December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------------------------------------
(UNAUDITED)
PARALOGIC
SOFTWARE
MIGHTYMAIL CORPORATION
NBC NETWORKS, INC. FOR THE SNAP! LLC
INTERNET, INC. FOR THE PERIOD PERIOD LIQUIDMARKET, INC. FOR THE PERIOD
FOR THE PERIOD JANUARY 1, JANUARY 1, FOR THE PERIOD JANUARY 1,
ENDED 1999 THROUGH 1999 THROUGH JANUARY 1, 1999 1999 THROUGH
DECEMBER 31, MAY 3, JUNE 16, THROUGH NOVEMBER 30,
1999 1999 1999 AUGUST 3, 1999 1999
-------------- --------------- ------------- ------------------- --------------
<S> <C> <C> <C> <C> <C>
Revenues..................... $ 35,581 $ -- $ 291 $ -- $ 33,909
Total cost of revenue........ 16,800 -- 12 -- 8,181
-------- ------- ------- ------- --------
Gross margin................. 18,781 -- 279 -- 25,728
Operating expenses:
Operating and development.. 7,674 634 319 519 11,026
Sales and marketing........ 21,952 24 160 269 28,019
General and
administrative........... 11,482 296 79 506 13,148
Promotion and advertising
provided by NBC.......... 16,858 - - - 55,748
Purchased in-process
research and
development.............. 2,603 - - - -
Amortization of deferred
compensation............. 962 1,283 962 701 4,117
Amortization of goodwill
and other intangible
assets................... 35,822 - - - -
Non-recurring charges...... 17,801 - - - -
-------- ------- ------- ------- --------
Total operating expenses..... 115,154 2,237 1,520 1,995 112,058
(Loss) income from
operations................. (96,373) (2,237) (1,241) (1,995) (86,330)
Other income (expense):
Interest income............ 10,963 1 2 12 32
Interest expense........... (1,421) (2) - (1) (1,580)
-------- ------- ------- ------- --------
Net income (loss)............ $(86,831) $(2,238) $(1,239) $(1,984) $(87,878)
======== ======= ======= ======= ========
Basic and diluted net loss
per share..................
Shares used in per share
calculations...............
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------
(UNAUDITED)
NBC
MULITMEDIA
DIVISION FOR
THE PERIOD
JANUARY 1, PRO FORMA
1999 THROUGH BUSINESS
NOVEMBER 30, COMBINATION
1999 COMBINED ADJUSTMENTS PRO FORMA
-------------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Revenues..................... $31,749 $ 101,530 $ -- $ 101,530
Total cost of revenue........ 5,745 30,738 -- 30,738
------- --------- --------- ---------
Gross margin................. 26,004 70,792 -- 70,792
Operating expenses:
Operating and development.. 412 20,584 - 20,584
Sales and marketing........ 1,050 51,474 - 51,474
General and
administrative........... 2,342 27,853 - 27,853
Promotion and advertising
provided by NBC.......... - 72,606 - 72,606
Purchased in-process
research and
development.............. - 2,603 - 2,603
Amortization of deferred
compensation............. - 8,025 - 8,025
Amortization of goodwill
and other intangible
assets................... - 35,822 240,771 (A) 276,593
Non-recurring charges...... - 17,801 - 17,801
------- --------- --------- ---------
Total operating expenses..... 3,804 236,768 240,771 477,539
(Loss) income from
operations................. 22,200 (165,976) (240,771) (406,747)
Other income (expense):
Interest income............ - 11,010 15,262 (B) 26,272
Interest expense........... - (3,004) (13,567)(C) (16,571)
------- --------- --------- ---------
Net income (loss)............ $22,200 $(157,970) $(239,076) $(397,046)
======= ========= ========= =========
Basic and diluted net loss
per share.................. (D) $ (8.17)
Shares used in per share
calculations............... (D) 48,612
</TABLE>
50
<PAGE>
The total estimated purchase costs have been allocated to assets and
liabilities, with Xoom.com treated as the accounting acquiror. The excess of the
purchase cost over the fair value of the net assets acquired has been allocated
to goodwill. The final purchase price allocations were calculated based on NBC
Multimedia's and Snap's balance sheets and Snap's stock options outstanding as
well as the balance sheets of MightyMail Networks, Inc., Paralogic Software
Corporation, and LiquidMarket, Inc. at the dates the transactions were
consummated.
The adjustments to the unaudited pro forma condensed combined statements of
operations for the year ended December 31, 1999 assume that the transactions
occurred as of January 1, 1999 and are as follows:
(A) To reflect the amortization of goodwill and other intangible assets
resulting from the transactions. The goodwill and other intangible assets
are being amortized over periods ranging from 2 to 7 years.
(B) To reflect interest income in connection with the $340 million note
receivable assigned to NBCi by NBC.
(C) To reflect interest charges in connection with the two zero coupon
convertible notes totaling $370 million issued to NBC and its affiliates
using an effective interest rate of 4% per annum.
(D) Basic and diluted net loss per share has been adjusted to reflect the
issuance of (i) 7,245,063 shares of Class A common stock to CNET and an
unaffiliated third party; and (ii) 23,590,680 shares of NBCi's Class B
common stock to an affiliate of NBC, as if the shares had been outstanding
for the entire period. The effect of stock options assumed in the
transactions has not been included, as its inclusion would be anti-dilutive.
51
<PAGE>
XOOM.COM
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
You should read the following Xoom.com, Inc. selected consolidated financial
data in conjunction with the consolidated financial statements and the notes
contained in this prospectus and "Xoom.com's Management's Discussion And
Analysis Of Financial Condition And Results Of Operations." The selected
historical consolidated statements of operations data presented below for the
period from April 16, 1996 (inception) through December 31, 1996 and for the
years ended December 31, 1997 and 1998 and the selected historical consolidated
balance sheet data at December 31, 1996, 1997 and 1998 are derived from our
consolidated financial statements, which have been audited by Ernst & Young LLP,
independent auditors, and are included in this prospectus. The selected
consolidated statement of operations data for the nine months ended
September 30, 1999, and 1998 are derived from selected unaudited condensed
consolidated financial statements appearing in this prospectus. The consolidated
financial data for the nine months ended September 30, 1999 are not necessarily
indicative of the results that may be expected for the year ending December 31,
1999 or any other future period.
<TABLE>
<CAPTION>
APRIL 16, 1996 TWELVE MONTHS ENDED NINE MONTHS ENDED
(INCEPTION) THROUGH ----------------------------- -------------------------------
DECEMBER 31, DECEMBER 31, DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1998 1998 1999
------------------- ------------- ------------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Consolidated Statement of Operations
Data:
Total net revenue....................... $ -- $ 841 $ 8,318 $ 4,865 $ 19,903
Cost of net revenue..................... -- 319 3,584 2,000 7,645
------ ------- -------- ------- --------
Gross profit............................ -- 522 4,734 2,865 12,258
Operating expenses:
Operating and development............. 266 1,150 3,841 2,558 5,708
Sales and marketing................... 23 292 2,834 1,570 13,507
General and administrative............ 150 721 3,366 2,158 6,846
Purchased in-process research &
development......................... -- -- 790 790 2,603
Amortization of deferred
compensation........................ -- 248 1,416 1,111 495
Amortization of intangible assets..... -- -- 1,843 1,087 7,836
Non-recurring charges................. -- 1,243 -- -- --
------ ------- -------- ------- --------
Total operating expenses................ 439 3,654 14,090 9,274 36,995
------ ------- -------- ------- --------
Loss from operations.................... (439) (3,132) (9,356) (6,409) (24,737)
Other income (expense):
Interest income....................... -- -- 187 37 6,213
Interest expense...................... -- -- (1,629) (20) (90)
------ ------- -------- ------- --------
Net loss................................ $ (439) $(3,132) $(10,798) $(6,392) $(18,614)
====== ======= ======== ======= ========
Net loss per share--basic and diluted... $(0.89) $ (0.64) $ (1.37) $ (0.89) $ (1.11)
====== ======= ======== ======= ========
Number of shares used in per share
calcuation--basic and diluted......... 496 4,874 7,879 7,172 16,780
====== ======= ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF AS OF
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1997 1998 1999
------------- ------------- --------------
(UNAUDITED)
<S> <C> <C> <C>
Consolidated Balance Sheet Data:
Cash, cash equivalents and short-term investments.......... $ 6 $56,575 $198,925
Working capital (deficit).................................. (1,400) 52,560 194,271
Total assets............................................... 782 66,874 389,072
Long-term obligations, less current portion................ -- 528 2,836
Total stockholders' equity (deficit)....................... (873) 60,333 373,285
</TABLE>
52
<PAGE>
XOOM.COM'S MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and related notes included elsewhere in this prospectus. The results
shown in this prospectus do not necessarily indicate the results to be expected
in any future periods. This discussion contains forward-looking statements based
on current expectations that involve risks and uncertainties. Actual results and
the timing of events may differ significantly from those projected in such
forward looking statements due to a number of factors, including those set forth
in the section entitled "Risk Factors" and elsewhere in this prospectus.
OVERVIEW
Xoom.com was incorporated in April 1996 and commenced offering products for
sale on its Web site in March 1997. From inception through December 1996,
Xoom.com had no sales and its operating activities related primarily to
developing necessary computer infrastructure, recruiting personnel, raising
capital and initial planning and development of the Xoom.com site. For the
period beginning with the operation of the Xoom.com site through December 31,
1997, Xoom.com continued these activities and focused on building sales
momentum, establishing relationships with manufacturers, marketing the Xoom.com
brand and establishing customer service and fulfillment operations.
Xoom.com generates net revenue from e-commerce, primarily through the use of
direct e-mail marketing, licensing and the sale of advertising on its Web site.
Total net revenue was $841,000 for the year ended December 31, 1997,
$8.3 million for the year ended December 31, 1998 and $19.9 million for the nine
months ended September 30, 1999. The increase in total net revenue was primarily
due to the growth of Xoom.com's member base, which resulted in increases in
e-commerce revenue, increased Web-based advertising revenue and, to a lesser
extent, an increase in license and other fees. Cost of net revenue increased
substantially in absolute dollars, reflecting the increased sales volume. As
Xoom.com has grown, its operating expenses in absolute dollars have increased.
From inception through September 30, 1999, Xoom.com generated total net
revenue of approximately $29.1 million. Quarterly net revenue increased from
approximately $420,000 in the fourth quarter of 1997 to $9.0 million in the
third quarter of 1999.
As of September 30, 1999, Xoom.com had an accumulated deficit of
$33.0 million.
Xoom.com has not achieved profitability on a quarterly or annual basis to
date, and anticipates that it will incur net losses for the foreseeable future.
The extent of these losses will depend, in part, on the amount and rates of
growth in its net revenue from e-commerce and advertising. Xoom.com expects its
operating expenses to increase significantly, especially in the areas of sales
and marketing and brand promotion. Xoom.com believes that period-to-period
comparisons of its operating results are not meaningful and that you should not
rely upon the results for any period as an indication of future performance.
Xoom.com's business, results of operations and financial condition will be
materially and adversely affected if:
- net revenue does not grow at anticipated rates;
- increases in operating expenses are not offset by commensurate increases
in net revenue; or
- Xoom.com is unable to adjust operating expense levels as a result of net
revenue.
Xoom.com's operating losses might increase in the future, and Xoom.com
cannot guarantee that it will ever achieve or sustain profitability.
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To date, Xoom.com has entered into various business and technology
acquisitions, license arrangements and strategic alliances in order to build its
communities, provide community-specific content, generate additional traffic,
increase the number of members and establish additional sources of net revenue.
In March 1998, Xoom.com acquired Paralogic Corporation, a chat service, for a
purchase price of approximately $3.0 million. Xoom.com also acquired Sitemail,
an HTML-based e-mail product, through its purchases of Global Bridges and
selected assets of Revolutionary Software in June 1998. HTML refers to hypertext
markup language, a computer language that people use widely to create Web sites.
Global Bridges, which Xoom.com purchased for approximately $1.2 million, owned
the exclusive selling rights to Sitemail. Revolutionary Software, from which
Xoom.com purchased selected assets for approximately $1.7 million, developed
Sitemail and had licensed it to Global Bridges. Also in June 1998, Xoom.com
purchased from ArcaMax an exclusive, perpetual license to use Greetings Online,
an online greeting card service, for approximately $644,000. Additionally, in
July 1998, Xoom.com acquired Pagecount, a Web page counter and guestbook
service, for approximately $1.5 million. In April 1999, Xoom.com acquired
Focused Presence, Inc., a company that operates a global directory of small
businesses, for approximately $1.7 million. In May 1999, Xoom.com acquired
Netfloppy.com LLC, a provider of online file storage for Web users for
approximately $1.4 million and MightyMail Networks, Inc., a developer of an
enhanced e-mail product that enables customization of e-mail according to user
preferences for approximately $23.1 million. In June 1999, Xoom.com acquired
Paralogic Software Corporation, which provides Web site authoring and community
building tools, such as Java based community products and services, including
customizable chat rooms, discussion boards, guestbooks and event calendars, for
approximately $35.4 million. In August 1999, Xoom.com acquired Liquid
Market Inc., the developer of a next-generation on-line comparison shopping
guide and purchasing service, for approximately $38.7 million, and Private
One, Inc., a designer and developer of a secure e-mail software service, for
approximately $2.2 million.
Because most Internet business acquisitions involve the purchase of
significant amounts of intangible assets, acquisitions of such businesses also
result in goodwill and purchased technology and significant charges for
purchased in-process research and development. During 1998, Xoom.com expensed
$790,000 for purchased in-process research and development and approximately
$1.8 million for the amortization of goodwill and purchased technology. During
the nine months ended September 30, 1998, Xoom.com expensed $790,000 for
purchased in-process research and development and $1.1 million for the
amortization of goodwill, purchased technology and acquired work force. During
the nine months ended September 30, 1999, Xoom.com expensed $2.6 million for
purchased in-process research and development and $7.8 million for the
amortization of goodwill, purchased technology and acquired workforce.
International sales comprised 30.0% of total net revenue in the year ended
December 31, 1997, 25.0% of total net revenue in the year ended December 31,
1998 and 14.0% of total net revenue in the nine months ended September 30, 1999.
Net revenue was $252,000 in the year ended December 31, 1997, $2.1 million in
the year ended December 31, 1998 and $2.8 million in the nine months ended
September 30, 1999.
Xoom.com has recorded deferred stock compensation charges of $0 during the
period from April 16, 1996, its inception, through December 31, 1996, $551,000
for the year ended December 31, 1997, $2.0 million for the year ended
December 31, 1998 and Xoom.com did not record any deferred compensation charges
in the nine months ended September 30, 1999. These charges account for the
difference between the exercise price and the value of some of the stock options
Xoom.com granted to its employees. The deferred compensation charges include
options granted to various employees that vest upon specified events, such as
the successful completion of an initial public offering or the achievement of
individual performance goals. In June 1998, Xoom.com modified these options so
that they fully vest upon the earlier of such an event or two
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years from the date of grant. Therefore, Xoom.com recorded related deferred
compensation charges of approximately $783,000 and amortization charges, based
on cumulative vesting to that date, of approximately $618,000 in June 1998.
Xoom.com recorded amortization of deferred stock compensation of $248,000 during
the year ended December 31, 1997, $1.4 million during the year ended
December 31, 1998 and $495,000 during the nine months ended September 30, 1999.
Xoom.com cannot guarantee, however, that it will not accrue additional
charges for other reasons or that its current estimates of these charges will
prove accurate, either of which events could seriously harm its business,
results of operations and financial condition.
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THE
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1998
The following table presents certain consolidated statement of operations
data for the periods indicated as a percentage of total net revenue.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- -------------------
1998 1999 1998 1999
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Net revenue:
E-commerce....................................... 66.6 % 48.3 % 69.2 % 51.5 %
Advertising...................................... 26.0 50.8 19.6 47.9
Licensing........................................ 7.4 0.9 11.2 0.6
------ ------ ------ ------
Total net revenue.............................. 100.0 100.0 100.0 100.0
Cost of net revenue:
Cost of e-commerce............................... 46.4 31.4 40.4 37.5
Cost of advertising revenue(1)................... -- 1.2 -- 0.9
Cost of licensing................................ 0.3 -- 0.7 --
------ ------ ------ ------
Cost of net revenue............................ 46.7 32.6 41.1 38.4
------ ------ ------ ------
Gross profit....................................... 53.3 67.4 58.9 61.6
Operating expenses:
Operating and development.......................... 52.6 33.6 52.6 28.7
Sales and marketing.............................. 37.1 66.6 32.3 67.9
General and administrative....................... 46.0 35.5 44.4 34.4
Purchased in-process research and development.... 5.7 -- 16.2 13.1
Amortization of deferred compensation............ 13.2 1.0 22.8 2.5
Amortization of intangible assets................ 32.2 61.8 22.3 39.4
------ ------ ------ ------
Total operating expenses....................... 186.8 198.5 190.6 186.0
------ ------ ------ ------
Loss from operations............................... (133.5) (131.1) (131.7) (124.4)
Other income, net.................................. 0.7 35.5 0.3 30.8
------ ------ ------ ------
Net loss........................................... (132.8)% (95.6)% (131.4)% (93.6)%
====== ====== ====== ======
</TABLE>
- ------------------------
(1) There were no material costs of advertising revenue during 1998.
NET REVENUE. Total net revenue for the three months ended September 30,
1999 was $9.0 million, an increase of approximately $6.7 million over revenues
of $2.3 million for the three months ended September 30, 1998. Total net revenue
for the nine months ended September 30, 1999 was $19.9 million, an increase of
approximately $15.0 million over revenues of $4.9 million for the nine months
ended September 30, 1998. The increases in both the three-month and nine-month
periods were primarily due to the following three factors: (A) the expansion of
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Xoom.com's membership base; (B) an increase in the frequency of e-mail offerings
and broader product offerings (which resulted in an increase in product sales
through e-commerce); and (C) an increase in Web-based advertising (Xoom.com's
higher Web site traffic increased its attractiveness to advertisers).
E-COMMERCE REVENUE. E-commerce revenue consists of on-line product sales
(inclusive of shipping and handling fees), as well as fees paid to Xoom.com for
co-branded e-mail-based product offers and for customer referrals. E-commerce
revenue increased to $4.3 million in the three months ended September 30, 1999
from $1.5 million in the three months ended September 30, 1998. E-commerce
revenue increased to $10.3 million in the nine months ended September 30, 1999
from $3.4 million in the nine months ended September 30, 1998. The increases in
net revenue in both periods are primarily due to the expansion of Xoom.com's
membership base, which resulted in an increase in product sales, as well as
expansion of the breadth of products offered. The percentage of Xoom.com's total
net revenue attributable to e-commerce revenue decreased to 48.3% in the three
months ended September 30, 1999 from 66.6% in the three months ended
September 30, 1998. The percentage of Xoom.com's total net revenue attributable
to e-commerce revenue decreased to 51.5% in the nine months ended September 30,
1999 from 69.2% in the nine months ended September 30, 1998. The decreases in
both periods were due to the fact that advertising revenue grew at a more rapid
rate than e-commerce revenue during the three and nine months ended
September 30, 1999 as compared to the three and nine months ended September 30,
1998. Xoom.com expects e-commerce revenue to continue to account for a large
percentage of net revenue as it expands its product offerings and increases its
direct e-commerce response rates through better member demographic information
and targeting of product offers.
ADVERTISING REVENUE. Advertising revenue increased to $4.6 million in the
three months ended September 30, 1999 from $598,000 in the three months ended
September 30, 1998. Advertising revenue increased to $9.5 million in the nine
months ended September 30, 1999 from $953,000 in the nine months ended
September 30, 1998. Of these increases, approximately $400,000 is related to
advertising inventory sold to Snap. The percentage of Xoom.com's total net
revenue attributable to advertising revenue increased to 50.8% in the three
months ended September 30, 1999 from 26.0% in the three months ended
September 30, 1998. The percentage of Xoom.com's total net revenue attributable
to advertising revenue increased to 47.9% in the nine months ended
September 30, 1999 from 19.6% in the nine months ended September 30, 1998. The
increases in advertising revenue in each period in both absolute dollars and in
percentage of net revenue are primarily a result of the increase in Xoom.com's
membership, increased site traffic and expansion of its advertising sales force.
As Xoom.com's membership base continues to grow and the demand for advertising
on its Web site remains strong, it can expect that its advertising revenues will
continue to represent a large percentage of its overall net revenue.
LICENSING REVENUE. Licensing revenue decreased to $80,000 in the three
months ended September 30, 1999 from $170,000 in the three months ended
September 30, 1998. Licensing revenue decreased to $119,000 in the nine months
ended September 30, 1999 from $546,000 in the three months ended September 30,
1998. As Xoom.com expands its e-commerce and advertising revenue, it can expect
that licensing revenue will continue to represent a small percentage of net
revenue.
COST OF NET REVENUE. Gross margins increased to 67.4% in the three months
ended September 30, 1999 from 53.3% in the three months ended September 30,
1998. Gross margins increased to 61.6% in the nine months ended September 30,
1999 from 58.9% in the nine months ended September 30, 1998. Both increases were
a result of a change in the revenue mix. In the three and nine months ended
September 30, 1999, advertising sales (which have higher margins
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than e-commerce sales) generated more of Xoom.com's overall revenue than
e-commerce sales, as compared to the three and nine months ended September 30,
1998.
COST OF E-COMMERCE REVENUE. Cost of e-commerce revenue consists primarily
of the costs of merchandise sold to customers, credit card commissions, product
fulfillment and outbound shipping and handling costs. Cost of e-commerce was
$2.8 million for the three months ended September 30, 1999 and it was
$1.1 million for the same period ended September 30, 1998. Cost of e-commerce
revenue was $7.5 million for the nine months ended September 30, 1999 and it was
$2.0 million for the same period ended September 30, 1998. The increase in
absolute dollars of the cost of e-commerce revenue in the three and nine months
ended September 30, 1999 as compared to the same period ended September 30, 1998
was primarily due to the overall growth in e-commerce revenue.
As a percentage of net revenue, the cost of e-commerce revenue was 31.4% for
the three months ended September 30, 1999 and it was 46.4% for the same period
ended September 30, 1998. As a percentage of net revenue, the cost of e-commerce
was 37.5% for the nine months ended September 30, 1999 and it was 40.4% for the
same period ended September 30, 1998. These decreases in percentages were
primarily due to the increase in sources of e-commerce revenue which have higher
margins, such as co-branded e-mail-based product offers and customer referrals.
COST OF ADVERTISING REVENUE. Cost of advertising revenue consists primarily
of revenue sharing amounts Xoom.com pays to its customers for advertising sold
on co-branded sites. Cost of advertising revenue was $108,000 in the three
months ended September 30, 1999, and it was $183,000 in the nine months ended
September 30, 1999. There was no material cost of advertising revenue in the
three and nine months ended September 30, 1998. These increases are primarily a
result of an increased demand for advertising on co-branded Web sites, and the
expansion of Xoom.com's advertising and business development sales forces.
As a percentage of net revenue, cost of advertising revenue was 1.2% in the
three months ended September 30, 1999 and it was 0.9% for the nine months ended
September 30, 1999. There was no material costs of advertising revenue in 1998.
Xoom.com expects the cost of advertising revenue to continue to grow as a
percentage of net revenue.
COST OF LICENSING REVENUE. Cost of licensing revenue consists primarily of
royalties on net revenue from license fees. Cost of licensing revenue was $4,000
for the three months ended September 30, 1999 and it was $7,000 for the same
period ended September 30, 1998. Cost of licensing revenue was $4,000 during the
nine months ended September 30, 1999 and it was $35,000 during the same period
ended September 30, 1998. Xoom.com expects that the cost of licensing revenue
should continue to be a small percentage of the total cost of revenues as
compared to the cost of e-commerce revenues.
OPERATING AND DEVELOPMENT EXPENSES. Operating and development expenses
consist primarily of payroll and related expenses for development and network
operations personnel and consultants, costs related to systems infrastructure
including Web site hosting and costs of acquired content to enhance Xoom.com's
Web site. Operating and development expenses increased to $3.0 million in the
three months ended September 30, 1999 from $1.2 million in the three months
ended September 30, 1998. Operating and development expenses increased to
$5.7 million in the nine months ended September 30, 1999 from $2.6 million in
the nine months ended September 30, 1998. Xoom.com believes operating and
development expenses will increase significantly in the future, especially in
relation to Web site hosting costs, as its membership grows, thus requiring
additional bandwidth to support the many free services offered to members.
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Xoom.com believes that it will need to make significant investments in its Web
site to remain competitive.
Operating and development costs decreased as a percentage of total net
revenue to 33.6% in the three months ended September 30, 1999 from 52.6% in the
three months ended September 30, 1998. Operating and development costs decreased
as a percentage of total net revenue to 28.7% in the nine months ended
September 30, 1999 from 52.6% in the nine months ended September 30, 1998. The
decreases in operating and development expense as a percentage of total net
revenue in both periods were due to the overall growth in net revenue.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of payroll and related expenses for personnel engaged in sales,
marketing, publishing and customer support, as well as advertising and
promotional expenditures. Sales and marketing expenses increased to
$6.0 million in the three months ended September 30, 1999 from $853,000 in the
three months ended September 30, 1998. Sales and marketing expenses increased to
$13.5 million in the nine months ended September 30, 1999 from $1.6 million in
the nine months ended September 30, 1998. The absolute dollar increases from
period to period in sales and marketing expenses were primarily attributable to
increased personnel and related expenses required to implement Xoom.com's sales
and marketing strategy as well as increased public relations and other
promotional and advertising expenses. Additionally, in connection with the
proposed business combination of Xoom.com, Snap and selected Internet assets of
NBC Multimedia, it incurred a $424,000 charge related to the cancellation of an
advertising contract in the nine months ended September 30, 1999. Xoom.com
expects to continue hiring additional personnel and to pursue a branding and
marketing campaign.
Sales and marketing expenses increased as a percentage of total net revenue
to 66.6% in the three months ended September 30, 1999 from 37.1% in the three
months ended September 30, 1998. Sales and marketing expenses increased as a
percentage of total net revenue to 67.9% in the nine months ended September 30,
1999 from 32.3% in the nine months ended September 30, 1998. The increases in
sales and marketing expenses as a percentage of total net revenue in both
periods were due to the hiring of new sales and marketing personnel and other
promotional and advertising expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of payroll and related costs for general corporate functions,
including finance, legal, accounting, business development, human resources,
investor relations, facilities and administration, as well as legal fees,
insurance and fees for professional services and directors. General and
administrative expenses increased to $3.2 million in the three months ended
September 30, 1999 from $1.1 million in the three months ended September 30,
1998. General and administrative expenses increased to $6.8 million in the nine
months ended September 30, 1999 from $2.2 million in the nine months ended
September 30, 1998. The absolute dollar increases from period to period in
general and administrative expenses were primarily due to increases in the
number of general and administrative personnel, as well as increases in
professional services and facilities-related expenses to support the growth of
Xoom.com's operations.
General and administrative expenses decreased as a percentage of total net
revenue to 35.5% in the three months ended September 30, 1999 from 46.0% in the
three months ended September 30, 1998. General and administrative expenses
decreased as a percentage of total net revenue to 34.4% in the nine months ended
September 30, 1999 from 44.4% in the nine months ended September 30, 1998. The
decreases in general and administrative expenses as a percentage of total net
revenue in both periods were due to the overall growth in net revenue.
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PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. For the three months ended
September 30, 1999 there were no charges for the cost of purchased in-process
research and development, and for the same period ended September 30, 1998
Xoom.com recognized $130,000 in connection with the acquisition of
Pagecount, Inc. For the nine months ended September 30, 1999 Xoom.com recognized
the cost of purchased in-process research and development of $2.6 million in
connection with the acquisitions of MightyMail Networks, Inc. and Paralogic
Software Corporation, and for the same period ended September 30, 1998 Xoom.com
recognized $790,000 in connection with the acquisitions of Paralogic
Corporation, the purchase of selected assets of Revolutionary Software, Inc. and
the acquisition of substantially all of the assets of Pagecount, Inc.
MIGHTYMAIL NETWORKS, INC. In connection with the MightyMail Networks
acquisition, Xoom.com acquired MightyMail Networks' e-mail platform. The
MightyMail platform allows branding material and marketing content to be placed
within person-to-person e-mail that is sent by individuals to other individuals.
The MightyMail application runs on an Oracle database and Unix operating system.
All the application code is written using Java servlets, which are Java applets
that run within a Web server environment. The MightyMail application uses a
three-tiered architecture common to most Internet applications: an interface
layer, an application layer, and a database layer. In addition, MightyMail uses
a custom mail agent that links into a standard mail transfer agent. In the
future, Xoom.com expects that this custom mail agent will be useable by any
standard mail protocol for users who wish to run the MightyMail application in
their own mail environment.
At the time of the acquisition, version 1.0 of the MightyMail technology was
functional as a commercially viable product. However, the current product has
various e-mail options and is not a truly customizable product with a rich
library of content or business user interface. In fact, version 1.0 is
approximately half of the true customizable, rich-e-mail product originally
intended to be developed. At the time of the acquisition, MightyMail Networks
was developing a second version of the MightyMail Networks technology, which was
not completely functional as a commercially viable product. Version 2.0 of the
MightyMail technology will be fully customizable, have access to a rich library
of content, have the ability to add surveys, be compatible with corporate
servers, have e-mail wizards, allow end-users to create their own content and
enable the inclusion of photographs.
The nature of the remaining estimated efforts necessary to develop version
2.0 of the MightyMail technology include:
- Integration with Xoom.com's existing Webmail system. This integration will
bring MightyMail capabilities, which includes the ability to compose rich
e-mail, to Xoom.com's existing account holders, which now exceed 700,000
users.
- Re-architecting of the MightyMail platform to be technically compatible
with the Xoom.com technology infrastructure. The primary compatibility
issue will be the integration of Apache Web server technology in place of
the current Java Web Server from Sun Microsystems.
As of the date of the technology's valuation, Xoom.com estimated that 50.0%
of the research and development effort had been completed at the date of
acquisition and expected the remaining research and development efforts relating
to the completion of the version 2.0 MightyMail technology would require
approximately six months of effort from the date of valuation through its
release date in the fourth quarter of 1999. Xoom.com estimated that three
full-time engineers would be required to complete the in-process projects. These
projects included the use of one full-time engineer for six months to work on
the Apache Web server integration efforts, and two full-time engineers for
six months to work on the MightyMail/Xoom.com e-mail integration efforts.
Accordingly, Xoom.com has estimated that the total estimated research and
development costs to complete MightyMail version 2.0 are $170,000. Xoom.com
completed the project in the fourth quarter of 1999.
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PARALOGIC SOFTWARE CORPORATION. In connection with the Paralogic Software
Corporation acquisition, Xoom.com acquired Paralogic Software Corporation's
product Anexa.com, a combination of Web site authoring and community building
tools that allows users to instantly create comprehensive Web sites featuring
multi-media albums, discussion forums, events, chat, news announcements,
classified ads, guest books, membership databases and community administration.
In connection with this acquisition Xoom.com also obtained ParaChat
Professional, a chat software that is licensed to individuals and businesses.
This software is hosted by a server and is supported by a staff of engineers,
both of which were acquired in conjunction with the Paralogic Software
Corporation acquisition. This is in contrast to the purchase of the ParaChat
Personal Network, which Xoom.com acquired in connection with the purchase of
Paralogic Corporation in March 1998. The ParaChat Personal Network is hosted by
Xoom.com, and is based on a free chat service that Xoom.com members can download
on to their Web pages.
At the time of acquisition, the current versions of Anexa.com and ParaChat
Professional did not represent the more robust, feature-rich products that
Paralogic Software Corporation envisioned and intended to develop in the twelve
months following the acquisition date. The future versions of these products are
expected to incorporate a number of significant additional features, including
enhanced scalability as traffic is added, a relational database management
system, support capability, e-mail verification, improved directory services,
search capability, instant messaging, file sharing capability, home page
publishing, additional administration and management tools, calendar and address
book capabilities, polls, gift galleries, greeting cards, voice chat and white
board functionality. The nature of the remaining estimated efforts necessary to
develop the acquired, incomplete new versions of Anexa.com and ParaChat
Professional into commercially viable products include:
- ANEXA.COM. These changes fall into the following categories:
(A) new features like Paralogic Instant Messenger, support for Uniplanet
calendar and support for MightyMail mail;
(B) feature enhancements and upgrades, like Media Albums Plus to handle
MP3 files, moderated message boards and improved event notification;
(C) user interface enhancements like administration tools; and
(D) bug fixing.
- PARACHAT PROFESSIONAL. These changes fall into the following categories:
(A) new features like voice chat and chat using HTML, the computer
language used to create hypertext documents;
(B) user interface enhancements and support for moderated events, such as
the ability to accept or deny audience questions;
(C) administration tools, like a filth filter and Chat 911 to help manage
abusive behavior in chat rooms;
(D) support for internationalization; and
(E) bug fixing.
As of the date of the technology's valuation, Xoom.com estimated that 17% of
the research and development effort had been completed at the date of
acquisition and expected the remaining research and development efforts relating
to the completion of the new versions of Anexa.com and ParaChat Professional
technology would require approximately nine months of effort from the date of
valuation through its expected release date of March 2000. These projects
include the use of
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eight engineers, spending 75% of their time on the project, for nine months, to
create the new versions of the products, at an estimated total cost to complete
of $576,000.
AMORTIZATION OF DEFERRED COMPENSATION. Xoom.com did not record any deferred
stock compensation charges to equity during the three months ended
September 30, 1999 and it recorded charges to equity of $1.0 million for the
same period ended September 30, 1998. Xoom.com did not record any deferred stock
compensation charges to equity during the nine months ended September 30, 1999
and it recorded charges to equity of $2.0 million for the same period ended
September 30, 1998. The deferred compensation charges account for the difference
between the exercise price and the deemed fair value of certain stock options
Xoom.com granted to its employees.
The amortization of deferred compensation reflects the amortization of the
deferred stock compensation charges to equity. Xoom.com has recorded
amortization of deferred compensation of $90,000 during the three months ended
September 30, 1999 and it recorded $304,000 during the same period ended
September 30, 1998. Xoom.com recorded amortization of deferred compensation of
$495,000 during the nine months ended September 30, 1999 and it recorded
$1.1 million during the same period ended September 30, 1998.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
totaled $5.5 million for the three months ended September 30, 1999 and it was
$741,000 for the same period ended September 30, 1998. Amortization of
intangible assets totaled $7.8 million for the nine months ended September 30,
1999 and it totaled $1.1 million for the same period ended September 30, 1998.
The additional amounts recorded in the three months ended September 30, 1999
represent amortization of intangible assets and goodwill resulting from
Xoom.com's acquisitions of LiquidMarket, Inc. and Private One, Inc., amortized
over periods ranging from 36 to 42 months. The additional amounts recorded in
the nine months ended September 30, 1999 represent amortization of intangible
assets and goodwill resulting from Xoom.com's acquisitions of Focused
Presence, Inc., MightyMail Networks, Inc., Net Floppy, Inc., Paralogic Software
Corporation, LiquidMarket, Inc. and Private One, Inc., amortized over periods
ranging from 36 to 48 months. The amounts recorded in the three months and the
nine months ended September 30, 1998, represent amortization of intangible
assets and goodwill resulting from Xoom.com's acquisitions of Paralogic
Corporation, Global Bridges Technologies, Inc., Pagecount, Inc. and the purchase
of certain assets of Revolutionary Software, Inc., amortized over periods
ranging from 24 to 42 months.
For the acquisitions in the periods ended September 30, 1999, Xoom.com has
determined the appropriateness of the estimated useful lives related to the
intangible assets based on general and specific analysis. In general, the
Internet is characterized by rapid technological change, changes in users and
customer requirements and preferences, frequent new product and service
introductions and the emergence of new industry standards and practices.
The market for community-based direct selling channels on the Internet is
new and rapidly evolving, and competition for members, consumers, visitors and
advertisers is intense. In addition, Xoom.com attracts members to its Web site
with a variety of free services, including home pages, e-mail, chat rooms,
electronic newsletters, clip art and software libraries, online greeting cards
and page counters. In order to continue attracting members using these various
methods, the free services must be constantly updated and improved.
With respect to the purchased technology associated with the business and
technology acquisitions, Xoom.com considered the effects of obsolescence,
demand, competition and other economic factors. Due to the rapid technological
change involved in the Internet, Xoom.com estimated that new technologies would
replace the intangible assets relating to the purchased technology within
periods ranging from 24 to 48 months.
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With respect to the goodwill associated with the acquisitions, Xoom.com
considered the effects of obsolescence, demand, competition, other economic
factors and expected actions of competitors and others. Based on these
considerations, Xoom.com determined the positive effect of the acquisitions, and
therefore the life of the goodwill, to range from 24 to 48 months.
OTHER INCOME, NET. Other income, net, represents interest Xoom.com earned
on its cash and investments, offset by interest expense it paid on its
borrowings. Xoom.com earned approximately $3.2 million of interest income in the
three months ended September 30, 1999 and it earned $37,000 in the same period
ended September 30, 1998. Xoom.com has earned approximately $6.2 million in
interest income in the nine months ended September 30, 1999 and it earned
$37,000 during the same period ended September 30, 1998. This increase was
primarily due to the increased cash balances available to invest as a result of
Xoom.com's initial public offering in December 1998, its secondary public
offering in April 1999 and the investment from NBC in July 1999.
Interest expense represents interest charges related to notes payable and
capital leases. Xoom.com incurred approximately $25,000 of interest expense in
the three months ended September 30, 1999 and it incurred approximately $20,000
in the same period ended September 30, 1998. Xoom.com incurred approximately
$90,000 of interest expense in the nine months ended September 30, 1999, and it
incurred approximately $20,000 in the same period ended September 30, 1998.
NET LOSS
Xoom.com's net loss for the three month period ended September 30, 1999 was
$8.6 million, and it was $3.1 million for the same period ended September 30,
1998. Xoom.com's net loss for the nine month period ended September 30, 1999 was
$18.6 million, and it was $6.4 million for the same period ended September 30,
1998. The increase in the net loss for both periods was a result of additional
expenses, primarily in sales and marketing, which were $6.0 million and
$13.5 million in the three and nine months ended September 30, 1999, compared to
$853,000, and $1.6 million in the three and nine months ended September 30,
1998. Additionally, Xoom.com's net loss for the three and nine months ended
September 30, 1999 and 1998 included costs resulting from acquisitions such as
amortization of goodwill and other intangible assets, and purchased in-process
research and development charges. In the three months ended September 30, 1999,
amortization related to goodwill and other intangibles was $5.5 million and
there were no charges to purchased in process research and development. In the
nine months ended September 30, 1999, amortization related to goodwill and other
intangibles was $7.8 million and purchased in process research and development
charges were $2.6 million. In the three months ended September 30, 1998,
amortization related to goodwill and other intangibles was $741,000 and
purchased in process research and development charges were $130,000. In the nine
months ended September 30, 1998, amortization related to goodwill and other
intangibles was $1.1 million and purchased in process research and development
charges were $790,000. The expenses in the three and nine months ended
September 30, 1999 were partially offset by net revenue of $9.0 million and
$19.9 million and other income, net of $3.2 million and $6.1 million. The
expenses in the three and nine months ended September 30, 1998 were partially
offset by net revenue of $2.3 million and $4.9 million.
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YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
The following table presents consolidated statement of operations data for
the periods indicated as a percentage of total net revenue. From inception
through December 31, 1996, Xoom.com had no net revenue as operations were
limited and consisted primarily of start-up activities.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------
1997 1998
-------- --------
<S> <C> <C>
Net revenue:
E-commerce................................................ 38.9 % 67.1 %
Advertising............................................... 7.1 25.8
License fees and other.................................... 54.0 7.1
------ ------
Total net revenue........................................... 100.0 100.0
Cost of net revenue(1):
Cost of e-commerce........................................ 20.3 42.6
Cost of license fees and other............................ 17.6 0.5
------ ------
Cost of net revenue......................................... 37.9 43.1
------ ------
Gross profit................................................ 62.1 56.9
Operating expenses:
Operating and development................................. 136.8 46.2
Sales and marketing....................................... 34.7 34.1
General and administrative................................ 85.7 40.5
Purchased in-process research and development............. -- 9.5
Amortization of deferred compensation..................... 29.5 17.0
Amortization of intangible assets......................... -- 22.1
Non-recurring charges..................................... 147.8 --
------ ------
Total operating expenses.................................... 434.5 169.4
------ ------
Loss from operations........................................ (372.4) (112.5)
Other income, net........................................... -- 0.6
Interest expense related to warrant......................... -- (17.9)
------ ------
Net loss.................................................... (372.4)% (129.8)%
====== ======
</TABLE>
- --------------------------
(1) There were no material costs of advertising revenue during the years ended
December 31, 1997 and 1998.
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NET REVENUE. Xoom.com began generating net revenue in the first quarter of
1997. Xoom.com's total net revenue increased to $8.3 million in the year ended
December 31, 1998 from $841,000 in the year ended December 31, 1997. Net revenue
is composed of e-commerce product sales, which includes outbound shipping and
handling fees, advertising revenue, license fees and other revenue. The increase
in net revenue was primarily due to the following factors:
- the expansion of its membership base;
- an increase in the frequency of e-mail offerings and broader product
offerings, which resulted in an increase in product sales through
e-commerce;
- an increase in Web based advertising;
- Xoom.com's higher Web site traffic; and
- to a lesser extent, an increase in license fees.
No customer accounted for more than 10% of total net revenue for the year
ended December 31, 1998, and one licensing customer accounted for 12% of total
net revenue for the year ended December 31, 1997.
E-COMMERCE REVENUE. E-commerce revenue increased to $5.6 million in the
year ended December 31, 1998 from $327,000 in the year ended December 31, 1997.
The increase in net revenue was primarily due to the expansion of Xoom.com's
membership base, which resulted in an increase in product sales, as well as
expansion of the breadth of products offered. The percentage of its total net
revenue attributable to e-commerce revenue increased to 67.1% in the year ended
December 31, 1998 from 38.9% in the year ended December 31, 1997. Xoom.com
expects e-commerce revenue to continue to account for a large percentage of net
revenue as Xoom.com expands its product offerings and increases its direct
e-commerce response rates through better member demographic information and
targeting of product offers.
Xoom.com believes that offering its customers attractive prices is an
essential component of its business strategy. Xoom.com may in the future
increase the discounts it offers customers and may otherwise alter its pricing
structures and policies. Xoom.com anticipates that any increase in discounts or
price reductions will reduce gross margins below those it experienced for the
years ended December 31, 1998 and 1997.
ADVERTISING REVENUE. Advertising revenue increased to $2.1 million in the
year ended December 31, 1998 from $60,000 in the year ended December 31, 1997.
The increase in advertising revenue is primarily a result of the increase in
Xoom.com's membership, site traffic and expansion of its advertising sales
force. The percentage of Xoom.com's total net revenue attributable to
advertising revenue increased to 25.8% in the year ended December 31, 1998 from
7.1% in the year ended December 31, 1997.
LICENSE FEES AND OTHER REVENUE. License fees and other revenue increased to
$592,000 in the year ended December 31, 1998 from $454,000 in the year ended
December 31, 1997. The increase in license fees and other revenue is primarily a
result of additional clip art and other utilities Xoom.com was able to license
to third parties. The percentage of its total net revenue attributable to
license fees decreased to 7.1% in the year ended December 31, 1998 from 54.0% in
the year ended December 31, 1997. As Xoom.com expands its e-commerce and
advertising revenue, license fees and other revenue will continue to represent a
smaller percentage of net revenue.
COST OF NET REVENUE. Gross margins decreased to 56.9% in the year ended
December 31, 1998 from 62.1% in the year ended December 31, 1997, as a result of
the increase in e-commerce revenue as a percentage of total net revenue. As a
percentage of total net revenue, the cost of
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e-commerce increased to 42.6% of net revenue in the year ended December 31, 1998
from 20.3% of net revenue in the year ended December 31, 1997. There were no
material costs of net revenue associated with advertising.
COST OF E-COMMERCE REVENUE. Cost of e-commerce consists primarily of the
costs of merchandise sold to customers, credit card commissions, product
fulfillment and outbound shipping and handling costs. Cost of e-commerce was
$3.5 million for the year ended December 31, 1998 and $171,000 for the year
ended December 31, 1997. As a percentage of e-commerce revenue, the cost of
e-commerce was 63.4% for the year ended December 31, 1998 and 52.3% for the year
ended December 31, 1997. The increase was primarily attributable to the fact
that in 1998 Xoom.com broadened its product offerings. Xoom.com's new product
offerings included items with higher costs than in the prior year.
COST OF LICENSE FEES AND OTHER REVENUE. Cost of license fees and other
revenue consists primarily of royalties on net revenue from license fees. Cost
of license fees was $42,000 for the year ended December 31, 1998 and $148,000
for the year ended December 31, 1997. As a percentage of license fees and other
revenue, cost of license fees and other revenue were 7.2% for the year ended
December 31, 1998 and 32.7% for the year ended December 31, 1997. Cost of
license fees and other for the year ended December 31, 1997 included $81,000 in
amortization of prepaid royalties related to a product that Xoom.com
discontinued in the fourth quarter of 1997.
The mix of products Xoom.com sells will impact its gross margins and the
overall mix of e-commerce revenue, advertising revenue and license and other
fees. Xoom.com typically recognizes higher gross margins on advertising revenue
and license and other fees, which are expected to comprise a lower percentage of
total net revenue in the future. Therefore, Xoom.com expects shifts in the mix
of sales will adversely impact its overall gross margin and could materially
adversely impact its business, results of operations and financial condition.
OPERATING AND DEVELOPMENT EXPENSES. Operating and development expenses
consist primarily of payroll and related expenses for development and network
operations personnel and consultants, costs related to systems infrastructure
including Web site hosting and costs of acquired content to enhance its Web
site. Operating and development expenses increased to $3.8 million in the year
ended December 31, 1998 from $1.2 million in the year ended December 31, 1997,
and $266,000 in the period from April 16, 1996 through December 31, 1996. From
inception to the year ended December 31, 1997, apart from its Web site, Xoom.com
incurred approximately $300,000 in costs relating to the development of a home
office software product, which was subsequently abandoned due to low sales
volume. From June 30, 1997 to December 31, 1998, the absolute dollar increases
from quarter to quarter in operating and development expenses were primarily
attributable to increases in the number of personnel and associated costs
related to enhancing the functionality and content of its Web site. Operating
and development costs decreased as a percentage of total net revenue to 46.2% in
the year ended December 31, 1998 from 136.8% in the year ended December 31,
1997.
Xoom.com believes operating and development expenses will increase
significantly in the future, especially in relation to Web site hosting costs,
as its membership grows, thus requiring additional bandwidth to support the many
free services offered to members. Xoom.com believes that it will need to make
significant investments in its Web site to remain competitive. Therefore,
Xoom.com expects that its operating and development expenses will continue to
increase in absolute dollars for the foreseeable future.
SALES AND MARKETING EXPENSES. Sales and marketing expenses consist
primarily of payroll and related expenses for personnel engaged in sales,
marketing, publishing and customer support, as well as advertising and
promotional expenditures. Sales and marketing expenses increased to
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$2.8 million in the year ended December 31, 1998 from $292,000 in the year ended
December 31, 1997, and $23,000 in the period from April 16, 1996 to
December 31, 1996. The absolute dollar increases from period to period in sales
and marketing expenses were primarily attributable to increased personnel and
related expenses required to implement its sales and marketing strategy as well
as increased public relations and other promotional expenses. Sales and
marketing costs decreased as a percentage of total net revenue to 34.1% in the
year ended December 31, 1998 from 34.7% in the year ended December 31, 1997.
Xoom.com expects to continue hiring additional personnel and to pursue a
branding and marketing campaign. Therefore, Xoom.com expects marketing and sales
expenses to increase significantly in absolute dollars.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of payroll and related costs for general corporate functions,
including finance, accounting, business development, human resources, investor
relations, facilities and administration, as well as legal fees, and fees for
professional services and directors. General and administrative expenses
increased to $3.4 million in the year ended December 31, 1998 from $721,000 in
the year ended December 31, 1997, and $150,000 from April 16, 1996 to
December 31, 1996. The absolute dollar increases from period to period in
general and administrative expenses were primarily due to increases in the
number of general and administrative personnel, professional services, directors
fees and facility expenses to support the growth of its operations. General and
administrative expenses decreased as a percentage of total net revenue to 40.5%
in the year ended December 31, 1998 from 85.7% in the year ended December 31,
1997. General and administrative expenses as a percentage of net revenue have
decreased because of the growth in net revenue. Xoom.com expects general and
administrative expenses to increase in absolute dollars in future periods as
Xoom.com expands its staff, incurs additional costs related to its operations
and is subject to the requirements of being a publicly traded company.
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. For the year ended
December 31, 1998, Xoom.com recognized charges to operations for purchased
in-process research and development of $330,000 in connection with the
acquisition of Paralogic Corporation, $330,000 in connection with the purchase
of selected assets of Revolutionary Software and $130,000 in connection with the
acquisition of Pagecount. Xoom.com did not recognize such charges for the year
ended December 31, 1997 or for the period from April 16, 1996 through
December 31, 1996.
In connection with the Paralogic Corporation acquisition, Xoom.com acquired
Paralogic Corporation's base of chat members, called the ParaChat Personal
Network, as well as the rights to use the underlying chat technology, called
ParaChat Personal. ParaChat Personal is designed to provide Web sites with an
option to offer chat technology without requiring Web site hosts to buy the
software, maintain or upgrade the software or learn any additional skills beyond
what is necessary to construct a Web site. The chat software is maintained on
Xoom.com's server and the Web site host is provided bits of source code or
"tags" that are incorporated into the Web site. The tags interface via the
Internet with the ParaChat server, and thus provide the Web site with chat
capabilities. In exchange for the free service, the Web site host allows banner
advertising on its site.
As of the time of acquisition, ParaChat Personal was not completely
functional as a commercially viable product. The nature, amount and timing of
the remaining estimated efforts necessary to develop the acquired, incomplete
ParaChat Personal technology into a commercially viable product included:
- REMOTE DATABASE AUTHENTICATION: The chat server used a very simple
flat-file database to maintain authentication information. In order to
allow users to control their own password and user information, it was
necessary to design a protocol using the Java programming language. This
language enabled the chat server to remotely query an external Oracle
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database through the Internet to retrieve and modify information relating
to the user and the chat room, e.g., the topic of discussion.
- CREATION OF NEW CHAT CLIENT: The chat software is comprised of two parts:
the client and the server. Although the server claimed compatibility with
Internet Standard RFC1459, this feature was not useable on a commercial
basis. Internet Standard RFC1459 is a standard message format for Internet
relay chat, allowing usage on multiple platforms. The server functioned
only with the limited ParaChat Personal client, which did not allow for
configuration or reconfiguration by the end-user to match the look and
feel of an existing Web site. In order to allow deployment on an existing
site, it was necessary to create an entirely new client that consisted of
various building blocks that could be composed by the end-user using HTML.
These building blocks would then use a Java-based communication protocol
to communicate with each other and coordinate communication with the chat
server. Since the Java-based communication protocol is not well defined,
and differs between browser implementations, a substantial amount of
additional software development was required, particularly because no
comparable client exists in the market today.
- CONTROL INTERFACE: The acquired ParaChat Personal network did not allow
users to control or administer their chat room in any way, e.g., eject
abusive users, close the chat room or even specify a discussion topic. The
enhancements necessary to make these features available, and to allow them
to be maintained and administered via the central authentication database
were complex and required significant additional development.
- ADVANCES IN BROWSER TECHNOLOGY: In addition to the above modifications and
other maintenance modifications and bug fixes, the rapid advances in Web
browser technology implied continuous implementation of new features to
exploit new browser technologies.
As of the date of the technology's valuation, Xoom.com estimated that 55.0%
of the research and development effort had been completed at the date of
acquisition and expected the remaining research and development efforts relating
to the completion of the ParaChat Personal technology would require
approximately six months of effort from the date of valuation through its
release date of September 1, 1998. Xoom.com estimated that three full-time
engineers would be required to complete the in-process projects. These projects
included the use of one full-time engineer for six months to work on the
external database connectivity efforts, one full-time engineer for six months to
work on the client layout efforts and one full-time engineer for six months to
work on the management and control interface efforts. Accordingly, it was
determined that total estimated research and development costs-to-complete for
the ParaChat Personal in-process project were $112,500. Xoom.com completed the
project by the scheduled date and the actual costs of completion were not
materially different than estimated.
As of the date of valuation, Xoom.com expected the benefit of the acquired
project to begin immediately after the estimated completion date. Xoom.com
expected that the in-process project would be developed to technological
feasibility concurrent with the September 1998 release date. Xoom.com has
demonstrated the ability to implement the on-going research and development on
time and on budget.
The technology that Xoom.com acquired from Revolutionary Software was a
Web-based e-mail technology known as SiteMail. This in-process Web-based e-mail
technology was designed to allow users to receive and send e-mail through the
Internet using a Web browser. Since the technology was Web-based, it would allow
for the integration of e-mail functionality into Web sites and would be
accessible by any Web-connected device anywhere in the world. Furthermore, by
integrating e-mail into a specific site, it would force the subscriber to visit
that site to access e-mail, thereby increasing traffic. In addition, when users
apply for e-mail accounts at Web sites offering SiteMail, they are given the
domain name of that Web site or company. The personalization of the domain
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name in an e-mail address has become an innovative way of promoting a company's
name or Web site.
As of the date of acquisition, SiteMail was in the alpha testing stage of
development and required the resolution of scalability technological hurdles in
order to complete the technology. In addition to the scalability issues, the
following functionality requirements also needed to be addressed by on-going
research and development efforts:
- improving the user interface;
- connecting the e-mail server with external databases;
- completing spam detection and filtering functions; and
- completing security enhancements for Unix Internet applications.
As of the date of acquisition, Xoom.com estimated that approximately 50.0%
of the research and development effort had been completed and expected the
remaining research and development efforts relating to the completion of the
SiteMail technology to continue from the date of acquisition through the release
date of November 1998. The remaining development effort was estimated to require
approximately four and a half months of engineering effort. Xoom.com estimated
that three and a half full-time developers would be required to complete this
project. The total cost of remaining development was estimated to be
approximately $98,000. Xoom.com completed the project by the scheduled date and
the actual costs of completion were not materially different than estimated.
In connection with the Pagecount acquisition, Xoom.com acquired a Web page
counter product, titled Pagecount. This product is a banner page counter that
tracks the number of visitors that view a member's site. It further breaks down
impression statistics, or page views by day, date and time. Other statistics
include a list of locations from where the requests originated and the host
names of up to 100 visitors. The software is maintained on the Pagecount server
and tags are integrated into the Web site which interface with the Pagecount
server. In exchange for the use of the Pagecount service, a banner advertisement
may be placed on each counter image.
Specifically, the nature, amount and timing of the remaining estimated
efforts necessary to develop the acquired incomplete Pagecount technology into a
commercially viable product included:
- STAGE OF DEVELOPMENT: As of the date of the transactions, Pagecount was
not yet able to handle large usage volumes and was only able to maintain
statistical information for small members experiencing low levels of
traffic. In addition, Pagecount did not have an advertising delivery
capability and, historically, advertisements had to be superimposed onto
the Web site by a human operator. This is a very inefficient method of
placing advertisements onto Web sites and as volume increases it would be
impossible to maintain the advertising inventory. At the date of
valuation, Pagecount was developing an advertising delivery system that
would maximize the advertising inventory being generated. Furthermore,
additional development was required to integrate the Pagecount technology
into its infrastructure in order for it to be compatible with its network.
- ADDITIONAL RESEARCH AND DEVELOPMENT REQUIRED: Ultimately, the most
significant research and development efforts related to the remaining
engineering of the Pagecount server included its ability to permit:
(A) advertisers in the network access to industry-standard reports;
(B) advertisements to be placed into the network using industry standard
delivery software; and
(C) users to attain enhanced reporting and credit for having displayed a
large number of banners, perhaps as a banner exchange offering.
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Xoom.com estimated that approximately 55.0% of the research and development
effort had been completed at the date of acquisition and expected the remaining
research and development efforts relating to the completion of the Pagecount
technology to continue from the date of acquisition through the release date of
mid-December 1998. The remaining development effort at the date of acquisition
was estimated to require approximately five months of engineering effort.
Xoom.com estimated that two and a half full-time developers would be required to
complete this project. The total estimated remaining development effort equates
to a total cost to complete of approximately $78,000. Xoom.com completed the
project by the scheduled date and the actual costs of completion were not
materially different than estimated.
AMORTIZATION OF DEFERRED COMPENSATION. Deferred compensation expense
reflects the amortization of stock compensation charges resulting from stock
options and restricted stock purchase agreements. Stock compensation charges
increased to $1.4 million for the year ended December 31, 1998 from $248,000 for
the year ended December 31, 1997. This increase was primarily attributable to
the modification of some options, which required Xoom.com to accelerate the
amortization of the related deferred compensation, which occurred during the
quarter ended June 30, 1998, as well as an increase in the number of options
Xoom.com granted to employees and consultants.
AMORTIZATION OF INTANGIBLE ASSETS. Amortization of intangible assets
totaled $1.8 million for the year ended December 31, 1998. This amount
represents amortization of intangible assets and goodwill resulting from its
acquisitions of Paralogic, Global Bridges and Pagecount and the purchase of
selected assets of Revolutionary Software, amortized over periods ranging from
24 to 42 months.
Xoom.com has determined that, in relation to the intangible assets and based
on general and specific analysis, two to three and a half year estimated useful
lives are appropriate. In general, the Internet is characterized by rapid
technological change, changes in users and customer requirements and
preferences, frequent new product and service introductions and the emergence of
new industry standards and practices.
The market for community-based direct selling channels on the Internet is
new and rapidly evolving and competition for members, consumers, visitors and
advertisers is intense. In addition, Xoom.com attracts members to its Web site
with a variety of free services, including home pages, e-mail, chat rooms,
electronic newsletters, clip art and software libraries, online greeting cards
and page counters. In order to continue attracting members using these various
methods, the free services must be constantly updated and improved.
With respect to the purchased technology associated with all business and
technology acquisitions, Xoom.com considered the effects of obsolescence,
demand, competition, and other economic factors. Due to the rapid technological
change involved in the Internet, Xoom.com estimated that new technologies would
replace the intangible assets relating to the purchased technology within a two
to three and a half year period.
With respect to the goodwill associated with all of the acquisitions,
Xoom.com considered the effects of obsolescence, demand, competition, other
economic factors and expected actions of competitors and others. Based on these
considerations, Xoom.com determined the positive effect of the acquisitions, and
therefore the life of the goodwill, to be from 24 to 42 months.
With respect to the intangible assets associated with Global Bridges,
Pagecount, Revolutionary Software and ArcaMax, Xoom.com considered the
competition for users of electronic mail, Web page counters and online greeting
card services. Xoom.com also considered the fact that they provide free e-mail
and online greeting card services to all members. Xoom.com expects to generate
revenue from advertising and direct e-commerce to such users. The competition
for these users is intense and Xoom.com expects that within two years Xoom.com
or its competitors will develop new technologies that will render the existing
products obsolete. The obsolescence of its
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existing technologies, without the introduction of new products, could result in
a loss of members. As a result, Xoom.com determined the positive effect of the
Global Bridges, Pagecount, Revolutionary Software and ArcaMax transactions, and
therefore the life of intangible assets, to be from 24 to 42 months.
NON-RECURRING CHARGES. Non-recurring charges totaled approximately
$1.2 million in the year ended December 31, 1997. These charges consisted of a
$243,000 write-off of costs associated with a discontinued product, and a
$1.0 million provision for a legal dispute for a copyright infringement claim
from Imageline relating to some of the clip art images that Xoom.com had
licensed from an unrelated third party. This litigation might subject Xoom.com
to significant liability for damages which could seriously harm its business,
results of operations, cash flows and financial condition. This might result in
invalidation of its proprietary rights. Even if the suit is without merit, it
could be time consuming and expensive to defend, and this could result in the
diversion of management time and attention, any of which might have a material
adverse impact on its business, results of operations, cash flows and financial
condition.
INCOME TAXES. There was no provision for federal or state income taxes for
any period as Xoom.com has incurred operating losses. As of December 31, 1998,
Xoom.com had net operating loss carryforwards for federal income tax purposes of
approximately $4.9 million. Xoom.com cannot assure you that it will realize the
benefit of the net operating loss carryforwards. The federal net operating loss
carryforwards will expire at various dates beginning in fiscal year 2011 through
2018 if Xoom.com does not use them. Due to the "change of ownership" provisions
of the Internal Revenue Code, the availability of Xoom.com's net operating loss
and credit carryforwards will be subject to an annual limitation against taxable
income in future periods as a result of the transactions that formed NBCi.
NET LOSS. Xoom.com's net loss for the year ended December 31, 1998 was
$10.8 million and it was $3.1 million for the year ended December 31, 1997. The
increase in the net loss was a result of an increase in operating expenses which
were $14.1 million in the year ended December 31, 1998, compared to
$3.7 million in the year ended December 31, 1997. The operating expenses in the
year ended December 31, 1998 included amortization of goodwill and other
intangible assets of $1.8 million related to acquisitions, and amortization of
deferred compensation of $1.4 million. The operating expenses in the year ended
December 31, 1997 also included amortization of deferred compensation of
$248,000 and non-recurring charges of $1.2 million. The expenses in the year
ended December 31, 1998 were partially offset by net revenue of $8.3 million.
The expenses in the year ended December 31, 1997 were partially offset by net
revenue of $841,000.
LIQUIDITY AND CAPITAL RESOURCES
Prior to Xoom.com's initial public offering, it financed its operations
primarily through the private placement of common stock. On December 9, 1998,
Xoom.com completed its initial public offering of common stock, in which it
issued 4,600,000 shares of common stock at a price of $14.00 per share. Proceeds
from the offering were approximately $57.3 million, net of offering costs. On
April 9, 1999, Xoom.com completed a secondary public offering of its common
stock and issued 4,600,000 shares (including 600,000 shares issued in connection
with the exercise of the underwriter over-allotment option) at a price of $66.00
per share. Of the 4,600,000 shares of common stock sold in the offering,
2,659,800 were sold by Xoom.com and 1,940,200 shares were sold by existing
stockholders. Proceeds from the follow-on offering were approximately
$167.0 million, net of offering costs. On July 29, 1999, Xoom.com issued 960,028
shares to NBC for $57.29 per share in connection with a Stock Purchase Agreement
dated June 11, 1999. Xoom.com received proceeds of $55.0 million.
Xoom.com had cash and cash equivalents and short-term investments of
approximately $56.6 million as of December 31, 1998 and $198.9 million as of
September 30, 1999. Xoom.com
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regularly invests excess funds in short-term money market funds, government
securities and commercial paper.
Net cash used in operating activities was $3.6 million for the year ended
December 31, 1998, $1.4 million for the year ended December 31, 1997 and
$635,000 for the period from April 16, 1996 through December 31, 1996. Cash used
in operating activities for the year ended 1997 was primarily the result of net
losses, partially offset by an increase in the contingency accrual. Cash used in
operating activities for the year ended December 31, 1998 was primarily the
result of net losses and an increase in accounts receivable related to the
growth of advertising revenues, partially offset by amortization of intangible
assets related to its acquisitions, amortization of deferred compensation
incurred in connection with the granting of options to employees to purchase
common stock, an increase in current liabilities as a result of the growth of
its business and a non-cash charge related to the issuance of warrants in
connection with a loan agreement.
Net cash used in operating activities for the nine months ended
September 30, 1999 was $14.9 million, and it was $3.1 million in the same period
ended September 30, 1998. Cash used in operating activities in the nine months
ended September 30, 1999 was primarily the result of net losses, $18.6 million,
an increase in accounts receivable, $2.5 million, related to the growth of
advertising revenues, and an increase in other assets, $7.6 million, related to
an increase in long-term deposits, partially offset by amortization of
intangible assets, $7.8 million, and in-process research and development
charges, $2.6 million, related to Xoom.com's acquisitions, and an increase in
trade accounts payable, $3.9 million, related to the growth of its business. In
the nine months ended September 30, 1998, cash used in operating activities was
primarily the result of net losses, $6.4 million and an increase in other assets
and prepaid royalties, $1.4 million, partially offset by amortization of
intangible assets, $1.1 million, and in-process research and development
charges, $790,000, related to Xoom.com's acquisitions, the amortization of
deferred compensation, $1.1 million, related to the granting of options to
employees to purchase common stock, and the increase in trade accounts payable,
$1.0 million, related to the overall growth of its business.
Net cash used in investing activities was $4.7 million for the year ended
December 31, 1998, $393,000 for the year ended December 31, 1997 and $64,000 for
the period from April 16, 1996 through December 31, 1996. Cash used in investing
activities in each period was primarily related to purchases of fixed assets,
except for the year ended December 31, 1998, in which cash used in investing
activities also included $2.0 million for the purchase of short-term investments
and $731,000 of net cash for business and asset acquisitions.
Net cash used in investing activities in the nine months ended
September 30, 1999 was $187.0 million and it was $1.4 million in the same period
ended September 30, 1998. Net cash used in investing activities in the nine
months ended September 30, 1999 was primarily related to the purchase of
marketable securities, $198.5 million, partially offset by the maturity of
investments, $18.5 million. The net cash used in investing activities in each
period was also related to purchases of fixed assets and net cash paid for
business acquisitions. From time to time, Xoom.com expects to evaluate the
acquisition of products, businesses and technologies that complement our
business. These acquisitions may involve cash investments.
Net cash provided by financing activities was $62.8 million for the year
ended December 31, 1998, $1.8 million for the year ended December 31, 1997 and
$700,000 for the period from April 16, 1996 through December 31, 1996. Cash
provided by financing activities was primarily attributable to net proceeds from
the issuance of common stock and the issuance of notes payable to stockholders.
In addition, for the year ended December 31, 1998, cash provided by financing
activities includes $512,000 received in connection with a secured financing
agreement with a leasing company and $1.3 million received in connection with a
loan agreement. For the year ended December 31, 1998, cash provided by financing
activities also included cash received from the issuance of 4,600,000 shares of
common stock upon the completion of its initial public offering. Proceeds from
the offering were approximately $57.3 million, net of offering costs. The cash
generated by financing activities in 1998 was offset by $3.2 million used to
repay notes payable.
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Net cash provided by financing activities in the nine months ended
September 30, 1999 was $222.8 million and it was $5.6 million in the same period
ended September 30, 1998. Net cash provided by financing activities in the nine
months ended September 30, 1999 was primarily related to proceeds from
Xoom.com's secondary public offering, $167.0 million, and proceeds from the
issuance of common stock to NBC, $55.0 million, partially offset by the
repayment of notes payable $608,000. Net cash provided by financing activities
in the nine months ended September 30, 1998 was primarily attributable to net
proceeds from the issuance of common stock $5.5 million.
As of September 30, 1999, Xoom.com's principal commitments consisted of
obligations outstanding under operating and capital leases. Although Xoom.com
has no material commitments for capital expenditures, it anticipates a
substantial increase in its capital expenditures and lease commitments
consistent with anticipated growth in operations, infrastructure and personnel.
Also, in the future Xoom.com may require a larger merchandise inventory in order
to provide better availability to customers and achieve purchasing efficiencies.
Xoom.com had notes payable relating to acquisitions totaling $1.7 million as
of December 31, 1998 and $241,000 as of September 30, 1999. Total notes payable
includes a note payable of $47,500, which bears interest at a rate of 5% and is
due in equal monthly payments of $2,500 through July 2000 to the former
stockholder of Global Bridges.
In the year ended December 31, 1998, Xoom.com issued warrants to purchase a
total of 314,747 shares of common stock at a price of $3.33 per share. These
warrants were exercised prior to its initial public offering on December 9,
1998.
On October 1, 1998, Xoom.com entered into a secured financing agreement with
a leasing company. The agreement provides for borrowings of up to a cumulative
amount of $1.0 million through July 31, 1999. As of September 30, 1999, its
outstanding principal balance under this agreement was approximately $425,000.
On November 3, 1998, Xoom.com entered into a secured loan agreement, which
provided for borrowings of up to $2.8 million. In November 1998, Xoom.com
borrowed $1.3 million under this agreement. Under the terms of the loan
agreement, Xoom.com agreed to issue the lender a warrant to purchase up to
183,333 shares of common stock at an exercise price equal to $14 share. Xoom.com
recorded a non-cash charge classified as a non-operating expense of
approximately $1.5 million during the fourth quarter of 1998 based on the fair
value of this warrant. As of December 31, 1998, all interest and principal
amounts had been fully paid, and the loan agreement had been canceled. On
January 11, 1999, the lender exercised the warrants in a net exercise
transactions and purchased 116,231 shares of Xoom.com's common stock at a price
of $14 per share. The effective interest rate on this secured loan agreement for
the year ended December 31, 1998 was approximately 1,450%.
Xoom.com believes that it has the financial resources needed to meet its
presently anticipated business requirements, including capital expenditure and
strategic operating programs, for at least the next 12 months. Thereafter, if
cash generated by operations is insufficient to satisfy its liquidity
requirements, Xoom.com may need to sell additional equity or debt securities or
obtain additional credit facilities. The sale of additional equity or
convertible debt securities may result in additional dilution to its
stockholders. Xoom.com may not be able to raise any such capital on terms
acceptable to Xoom.com or at all.
DISCLOSURES ABOUT MARKET RISK
Xoom.com's exposure to market risk is principally confined to its short-term
available-for-sale securities, which have short maturities and, therefore,
minimal and immaterial market risk.
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BUSINESS
OVERVIEW
NBCi is an integrated Internet media company that combines portal, community
and e-commerce services designed to deliver a comprehensive, next-generation
online experience to a global audience. Our online properties ranked in the top
ten of the most visited sites on the Internet in December 1999 with over 14.9
million unique visitors and an aggregate Internet reach among home and work
users of 22.9%, according to Media Metrix reports. We deliver enhanced branded
services and content with a growing emphasis on services that take advantage of
Internet ubiquity and broadband access. NBCi integrates fast-growing and premier
assets such as Snap.com, Xoom.com, NBC.com, VideoSeeker.com and NBC-IN.com and
content from AccessHollywood.com. We combine the NBC media brand and related
content with the complementary portal and navigation services of Snap.com and
community and direct e-commerce services of Xoom.com to deliver a comprehensive,
entertaining and compelling Internet experience to a broad audience. We believe
our core services will provide the foundation for a next-generation media
company whose e-commerce and community orientation will reach a diverse user
base through a variety of interactive media including broadcast and cable
television, radio and the Internet.
We believe that our services create an environment that attracts users and
encourages both longer and repeat visits as well as customer loyalty, resulting
in a large base of registered members. These services are focused on generating
both advertising and e-commerce revenue by allowing advertisers and merchants to
reach a broad and segmented audience of Internet users. Our portfolio of
content, community and e-commerce services include:
- ENTERTAINMENT SERVICES: free rich media and broadband content,
user-generated content, chat rooms and online greeting cards
- INFORMATION SERVICES: free directory, global resources and information,
local and personalized content and personal finance information
- UTILITY SERVICES: free e-mail, search engine, Web development tools, home
pages, digital user storage and software libraries
- E-COMMERCE SERVICES: business-to-consumer services and
business-to-business tools such as auctions, price comparison shopping
engine, database marketing, shopping directory, digital wallet, business
portal and business directory
We believe our ability to aggregate information about our consumers'
interests across these online services, in combination with our ability to
coordinate network advertising with NBC, will provide cross-selling and
promotional opportunities that distinguish us from most of our competitors in
the Internet industry. In addition, we have the ability to target customers with
advertising and e-commerce opportunities using demographic data and information
on buying habits, services used and lifestyle interests. This information is
collected on a permission basis and we use it to assist advertisers in focusing
and monitoring the effectiveness of their presentations, as well as to offer
relevant e-commerce opportunities. We facilitate these transactions through our
direct e-commerce platform and proprietary database management system.
The total number of registered users on our various properties was over
16 million as of December 31, 1999, with new members registering at the rate of
33,000 per day during December 1999. In December 1999, our Internet properties
had over 783 million collective page views. From these users we have generated
$45.3 million and $10.4 million in pro forma revenues from advertising and
e-commerce, respectively, in the nine months ended September 30, 1999.
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INDUSTRY BACKGROUND
GROWTH OF THE INTERNET. According to IDC, the number of Web users will grow
from approximately 97 million worldwide in 1998 to approximately 320 million
worldwide by the end of 2002. In the first few years of the development of the
Internet, general portals attracted the largest base of users as a result of the
provision of search and directory services. Over the last few years, however,
community sites have been among the fastest growing Internet sites as measured
by the number of users. This is a result of the growing attraction of
user-generated content and the desire for communication among like-minded
individuals through chat and discussion forums. More recently, as the number of
Internet users has increased, highly focused consumer and business sites have
developed to attract audiences with a particular interest. The nature and form
of content being provided on the Internet has also expanded dramatically as a
result of an increase in the participation of media and commerce companies
conducting their businesses on the Internet. In addition, traditional media
companies have used their access to content and promotion to create and drive
traffic to their own Web properties.
ONLINE ADVERTISING AND DIRECT MARKETING. The growth of the Internet has
created an important new advertising channel. In particular, the emergence of
online community sites and their ability to collect detailed demographic data
about users has allowed advertisers to target specific groups of people with an
affinity for particular products and services. Tools not available in
traditional advertising media, such as real-time measurement of "click-through"
on advertising banners, further increase the attractiveness of Web advertising
by giving advertisers instant feedback on campaigns without incurring major
development costs. Advertisers can thus more easily deliver targeted messages in
a cost effective manner. Forrester Research projects that the dollar value of
advertising on the Web is expected to increase from approximately $2.8 billion
in 1999 to approximately $22.2 billion in 2004.
The ability to target potential customers with specific demographic
characteristics is also facilitating the growth in direct e-commerce campaigns.
These campaigns use e-mail to reach specific groups of buyers worldwide,
offering them a significantly broader, yet more relevant selection of products.
The costs of direct e-commerce via e-mail are dramatically lower than those of
traditional direct marketing techniques and success rates are usually higher due
to the availability of better information about the targeted audience. Forrester
Research estimates that the amount spent on online direct marketing in the
United States will increase from $420 million in 1999 to $11.8 billion in 2004,
at which time online direct marketing is expected to comprise 53% of online
advertising expenditures in the United States.
BUSINESS-TO-CONSUMER E-COMMERCE. The Internet has become a significant
global medium for e-commerce. The Internet allows companies to develop
one-to-one relationships with customers worldwide without making significant
investments in traditional infrastructure such as retail outlets, distribution
networks and sales personnel. The convenience and vast selection of online
shopping are also a significant factor in the growth of e-commerce.
Additionally, an online consumer's ability to comparison shop is greatly
enhanced by the ability to access multiple retailers via the Internet. According
to Forrester Research, total online retail sales in the U.S. are expected to
increase from $7.8 billion in 1998 to $108 billion in 2003. Forrester Research
also projects that the number of U.S. households that shop online will reach 40
million in 2003.
BUSINESS-TO-BUSINESS E-COMMERCE. The Internet also provides businesses the
opportunity to transact with other businesses via online marketplaces and
business portals by enabling buyers and suppliers to meet and automate
transactions on the Internet. Online marketplaces take advantage of the buying
power of a large customer base to attract a large number of suppliers, thereby
allowing businesses to streamline complex processes, lower costs and improve
efficiency. Forrester Research estimates that business-to-business electronic
commerce in the United States
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will grow from $109 billion in 1999 to $1.3 trillion in 2003, accounting for 90%
of the dollar value of all electronic commerce by 2003.
BROADBAND NETWORK GROWTH. The increasing availability of higher speed
Internet access from the home and the proliferation of Internet devices other
than the PC are beginning to result in significant changes in the dynamics of
Internet usage. The Internet is increasingly being used as a means to distribute
video, audio and other high data-rate content, as well as distributed
applications. Additionally, devices such as Internet enabled wireless phones and
personal digital assistants are enabling users to access Internet content and
services outside the home and office. As a result, consumers will access the
Internet with greater frequency and duration, building a more valuable and loyal
interaction between Internet services and users.
RECENT CONSOLIDATION. By providing a complete set of content, information
and services, Internet portals and communities attract a larger audience,
offering a more attractive platform for companies advertising on the Internet or
conducting e-commerce activities. Over the last twelve months, there has been
significant consolidation in the Internet industry as a result of increased
competition for users, advertising dollars and e-commerce sales revenue. Such
consolidation allows companies to offer services more quickly than if they built
them internally. Traditional media and cable companies have participated in this
consolidation using their access to content, promotion and distribution to
create significant Web properties.
NBCI STRATEGY
By providing a broad array of professionally created and user-created
content in a single service, we intend to develop the leading integrated media
properties on the Internet. Our strategy is to build upon our key component
assets, which are:
- the NBCi name, capitalizing on the broad reach and appeal of the NBC
television network brand to develop an online brand that will enable us to
convert television viewers into users of our online properties;
- Snap.com, a leading information, navigation and content aggregation portal
service;
- Xoom.com, a leading community based Web Site offering direct e-commerce
and community services, and a large membership base; and
- the Internet assets contributed by NBC, including NBC.com, NBC-IN.com and
VideoSeeker.com and content from AccessHollywood.com, which provide access
to a broad base of differentiated users and unique content.
We intend to complete the integration of our online properties rapidly and
cost effectively, to continually upgrade and expand our portfolio of services to
increase the level of Internet traffic on our Web sites and to grow our
registered user base. We intend to capture relevant data on such users to
provide more relevant information to advertisers and more personalized service
to our user base.
BUILD AND ENHANCE OUR CORE BRANDS. We may integrate and promote our other
core brands, such as Snap and Xoom.com, under the NBCi brand by leveraging our
relationship with NBC and its strong appeal to television viewers and
advertisers. We plan to use content recognizable by viewers of NBC television
programs throughout our Internet properties to capitalize on synergies between
on-air and online media. As a result, we believe we will be able to brand our
Internet properties as an ideal destination for a more accessible, immersive and
entertaining rich media environment providing value for both our users and our
business partners. Our agreements with Clear Channel Broadcasting, NBC and
others will enable us to tie together opportunities
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across multiple media platforms--Internet, broadcast, cable and radio--allowing
us and our partners to reach and connect with virtually every household in the
United States.
We will promote the NBCi brand and continue to promote our other online
brands through the purchase of $405 million in advertising through November 2003
on the NBC television network, CNBC, MSNBC and NBC's owned and operated
television stations. We believe our relationship with NBC provides us access to
the premier television network. According to data furnished by Nielsen Media
Research, for the television season that ended in May 1999, NBC was the
most-watched television network during primetime among adults age 18 to 54 in
the United States. Throughout the 1998-1999 television season, an average of
more than 156 million people watched NBC television programming at least once
each week, representing more than 60% of the population of the United States. In
addition, the results of a study commissioned by NBC from Nielsen Media Research
in 1999 indicate that, during the February sweeps period, NBC primetime
programming attracted 25% more viewers with access to the Internet than the
primetime programming of its nearest network competitor, and 65% more of such
viewers than the primetime programming of the top ten cable networks combined.
In addition to television advertising through our relationship with NBC, we
have entered into an agreement with Clear Channel Broadcasting, Inc., under
which our services will be promoted on 474 of Clear Channel's radio stations and
integrated into the stations' companion Internet properties. We also intend to
promote new brands and services such as SnapTV, through our strategic
relationship with ValueVision International, Inc. We believe that this set of
media links provides us with a diverse group of Internet entry points that will
help us to extend our reach to potential users.
INCREASE CONTENT AND SERVICE OFFERINGS TO GROW OUR USER BASE. We intend to
increase traffic to our Web sites and membership by offering visitors attractive
free services and content, and maintaining a large and diverse range of active
communities centered around special interest categories. We believe that through
our promotion on NBC and integration of NBC television content into our Web
sites, we will also be able to attract an increasing number of television
viewers. By increasing our user and member base, as well as expanding our
distribution channels, we will create a more dynamic environment for our
advertisers and e-commerce partners, allowing them to target specific audiences
across various media. A key component of our distribution model is our
innovative SnapLENS system which enables the rapid and cost effective creation
of special versions of the Snap.com Web site, with a unique "look and feel,"
customized content and targeted advertising.
CREATE A VALUABLE ADVERTISING AND E-COMMERCE FRANCHISE. We intend to
maximize revenue streams and create a valuable advertising and e-commerce
franchise by focusing on a number of key strategies, including:
- expanding our advertising customer base by leveraging NBC's extensive
advertising relationships to create synergies between on-air and online
media and create unique ways for advertisers to reach consumers;
- increasing the average size and duration of our advertising contracts by
offering special sponsorship and promotional advertising and marketing
programs across our media properties;
- obtaining higher average advertising rates by increasing the ability of
advertisers to provide highly targeted advertising to our membership base;
- hiring additional direct sales representatives and continuing to invest in
improving our advertisement serving and targeting technology; and
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- expanding our e-commerce product offerings and services, such as magazine
subscriptions, appliances, games, photography supplies, home and auto
insurance, wireless telecommunication services and membership clubs.
AGGREGATE USERS AROUND SELECTED VERTICAL CONTENT AREAS. We intend to
selectively develop, partner with or acquire vertical content areas to create
active sets of users with similar interests. A vertical content area is a Web
site on topics of general interest such as sports, weather or health, which is
supported by professionally created content and may contain chat rooms, bulletin
boards and e-commerce product offerings related to that particular topic. As
opposed to a general Web audience, users with a specific set of interests
provide opportunities to sell more targeted advertising and facilitate more
online transactions. Advertisers are willing to pay premium prices to reach such
targeted audiences. By providing unique content, we intend to develop large
databases of users with common interests. A key component of this strategy will
be to leverage and build upon Xoom.com's community sites and membership base.
Similarly, usage of NBC.com, VideoSeeker.com and NBC-IN.com's network of local
sites provides demographic and affinity segmentation that may be highly
desirable to advertisers. We will also seek to identify opportunities to
leverage partner relationships and selectively seek acquisitions in areas of
particular value to accomplish this goal.
LEAD NEXT-GENERATION BROADBAND AND WIRELESS INITIATIVES. The Internet is
increasingly being used as a means to distribute video and audio content, gaming
services and distributed applications. We believe that as broadband access
proliferates and users become increasingly attuned to broadband content and
services, our industry-leading capabilities in this area will serve to
differentiate us from competitive sites. Widespread deployment and adoption of
broadband technology should accelerate the acceptance of the Internet as an
important new medium for distributing such content, as well as next generation
products with significantly more functionality and value for users. Snap was one
of the first portals to deliver broadband content through the Snap.com For
Higher Speed Users Web site. VideoSeeker.com provides our users with access to
streaming video content on the Web. Our agreement with Telocity, a national
broadband service provider, will provide users with a co-branded, high speed
Internet access service. This service will be specially designed for broadband
users to take advantage of improved video and audio technologies. We intend to
seek additional opportunities to vastly expand the nature and amount of
broadband content available to our user base through internal development,
acquisitions and strategic alliances. In addition, we also intend to utilize
emerging technologies, such as wireless Internet access devices to reach more
users more times each day.
BUILD OUR BUSINESS-TO-BUSINESS OFFERINGS. We intend to leverage our key
business-to-business assets to selectively enter the rapidly expanding
business-to-business e-commerce marketplace. Our existing business-to-business
assets include a business portal, a business directory comprised of more than
seven million businesses, including 750,000 registered members, and a comparison
engine allowing users to compare the prices of products offered by multiple
suppliers. We also believe our experience in operating an online auction site,
our relationships with our current business-to-business partners and users, and
our skills in content management, direct e-commerce marketing and database
management will facilitate our entry into the business-to-business market. We
intend to rely on the substantial experience of our board of directors in
identifying opportunities where we can obtain a leadership position with a view
towards long-term value. To become the industry leader in our selected
categories, we will need to quickly obtain a dominant position by acquiring
companies in our targeted markets.
On February 1, 2000 we entered into an agreement to acquire Allbusiness.com,
a privately held company with more than 80 employees active in the
business-to-business field. The transaction will be a stock for stock merger to
be valued at closing at appoximately $225 million and is expected to be
accounted for as a purchase. In addition, we will assume the outstanding options
of
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Allbusiness.com. The transaction is expected to close by the end of the first
quarter and is subject to customary closing conditions. Allbusiness.com's Web
site is designed to offer practical solutions to the everyday challenges of
starting, managing and growing a business and provides entrepreneurs and small
businesses with a single point of access for resources that enhance operations,
solve problems and save money. We believe Allbusiness.com will provide a broad
platform from which we can develop and integrate our business-to-business
services and products.
ACCELERATE PURSUIT OF INTERNATIONAL OPPORTUNITIES. We intend to rapidly
expand our platform internationally by providing our Web sites in local
languages and offering our services to local advertisers and e-commerce
companies. We also plan to leverage NBC's worldwide relationships to expand our
operations internationally. The international market for Internet services is
not as mature as in the United States and opportunities exist to take a
leadership position in several foreign markets. We have targeted several
European and Asian countries for possible international expansion and are
currently seeking local partners to help facilitate such expansion and provide
local support in terms of personnel and promotion.
In January 2000 we entered into a joint venture agreement with
Asiacontent.com Ltd., a developer of Internet content, advertising and commerce
services in the Asian market. The joint venture is intended to develop and
launch comprehensive, localized Internet community, content, portal and shopping
services in Korea, Hong Kong, Singapore, Malaysia and Taiwan. These new Web
sites will combine our content and technology with localized content and
services developed by Asiacontent.com and other local providers to offer users,
partners and advertisers in the Asian markets served high quality Internet
services focused on local languages.
CONTINUE TO DEVELOP OR ACQUIRE LEADING-EDGE TARGETING TECHNOLOGY AND
SOFTWARE. We intend to continue to develop leading edge technologies to provide
our users the highest possible level of service and our advertisers and
e-commerce partners the benefit of our proprietary targeting capabilities. Areas
of focus for consumer services include broadband technologies for the delivery
of streaming video and audio, and communication tools such as e-mail, messaging
and Internet telephony, among others. Advertisers currently benefit from the
integration of advertisements and product offers within search requests on
Snap.com. We have developed a proprietary system for database stratification,
offer targeting and delivery. This system uses demographic and personal interest
information provided by our members' prior purchasing history, along with data
appended from third party providers, to determine a set of offers most likely to
appeal to individual members. We intend to expand and improve on these
capabilities by continuing to invest in the development of new technologies or
by acquiring such technologies through acquisitions, joint ventures or strategic
alliances.
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OUR INTERNET ASSETS, PRODUCTS AND SERVICES
We provide a comprehensive and compelling online experience to users
worldwide via our powerful branded Web properties that incorporate
entertainment, information, utility and e-commerce services delivered across all
bandwidths. NBCi's select portfolio of online properties is comprised of highly
popular, content-rich sites and services geared to specific audiences with
various interests and needs.
NBCI INTERNET ASSETS
<TABLE>
<CAPTION>
<S> <C>
SNAP.COM. Snap is currently NBCi's Internet portal service and
flagship consumer brand. Snap offers efficient, high-quality
[Snap.com logo] Internet search results, comprehensive directory listings,
proprietary Resource Centers and engaging content from hundreds of
leading Web publishers.
XOOM.COM. Xoom.com is a leading online community service that
provides members with services such as home page development tools
[Xoom.com logo] and digital storage space. Members also receive targeted product and
service offerings from partner merchants and advertisers.
NBC.COM. NBC.com is a full-scale online offering from the NBC
Television Network, featuring original online programming,
comprehensive backgrounds on the network's shows and stars,
interactive promotional campaigns, and innovative online product
[NBC.com logo] offerings linked directly to on-air programs. Visitors to the site
will find a growing lineup of exclusive video content, show-related
games and downloads, exclusive Web content designed to complement
and extend NBC shows and network branding into the online space.
NBC-IN.COM. NBC-IN.com is a resource for valuable local information
on the Web, providing access to local content via the Web sites of
over 100 local NBC television affiliates nationwide. Users can find
[NBC-IN.com logo] promotions, contests and coupons, and various other local
information such as job and real estate listings, eateries and
television programming.
VIDEOSEEKER.COM. VideoSeeker.com is a leading-edge video resource on
the Internet-a one-stop, on-demand service featuring popular video
[VideoSeeker.com logo] content from NBC and third-party programmers. VideoSeeker is
building a comprehensive video directory on the Web, with popular
video content channels and user-friendly search capabilities.
</TABLE>
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PRODUCTS AND SERVICES
The following chart illustrates the categories and services that NBCi offers
through our online properties:
<TABLE>
<CAPTION>
<S> <C>
CATEGORIES SERVICES
Entertainment Services Free rich media and broadband content
User-generated content
Chat rooms
Online greeting cards
Information Services Free directory
Global resources and information
Local and personalized content
Personal finance information
Utility Services E-mail
Search engine
Web development tools
Home pages
Digital user storage and software
libraries
E-Commerce Services Auctions
Price comparison shopping engine
Database marketing
Shopping directory
Digital wallet
Business portal
Business directory
</TABLE>
ENTERTAINMENT SERVICES
FREE RICH MEDIA AND BROADBAND CONTENT. Through NBC.com we offer information
and promotion for NBC on-air broadcasts as well as original show extensions
developed specifically for Internet users. We provide show descriptions, episode
updates, actor biographies, schedule information, "backstage tours", online-only
interviews, online show "spin-offs", Internet-only segments and program trivia
for NBC entertainment programming. We also adapt program content owned by or
licensed to NBC for interactive uses, such as games and photo galleries. Through
AccessHollywood.com, we leverage the popularity of an on-air show to attract
online users interested in up-to-date entertainment industry news and online
extensions of the show. Our Videoseeker.com service is an innovative, on-demand
video service with search capability that provides access to various NBC-related
and third party video content.
To provide a more entertaining and dynamic online experience, we have
developed several initiatives to provide an enriched offering of our services to
broadband-enabled Internet users. Our Snap.com For Higher Speed Users, launched
in March 1999, uses innovative broadband technology to optimize users' access to
rapidly-evolving forms of content, including video, audio, animation and gaming,
to create a richer Internet experience. This service enhances and supports
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the core functionality of Snap.com by offering multimedia content and navigation
services to the expanding number of users with high-speed Internet access. In
addition, because Snap.com For Higher Speed Users is positioned as an
alternative rather than a separate product experience, users can switch easily
between Snap.com and Snap.com For Higher Speed Users while keeping all of their
personalization and membership settings intact.
Through our relationship with Telocity, we expect to offer a co-branded
high-speed Internet access service to consumers by the third quarter of 2000.
Through this co-branded service we expect to provide entertainment, shopping,
games, search applications and other utility services designed for broadband
users.
USER-GENERATED CONTENT, CHAT ROOMS AND ONLINE GREETING CARDS. Our members
can participate in one or more of over 200 topical communities where they can
exchange ideas and information. Members may also enter specialized forums such
as Investor Place, Women's Circle or Health & Fitness, where they can gain
access to professional content and special product and service offers available
only on our Web sites. We also generate significant user created content by
offering members the tools necessary to create their own personalized Web sites
and then provide the digital storage space to add their sites to the Internet.
Our community services include user created content, chat, bulletin boards,
electronic newsletters, online greeting cards, games and other services, which
enable us to attract and retain customers. These services build a long-term
relationship between NBCi and our visitors and members. By serving as a virtual
meeting ground for many people, we continue to broaden our reach and increase
the opportunities for our advertisers and e-commerce partners.
INFORMATION SERVICES
FREE DIRECTORY. The Snap Directory is a hierarchical listing of Web pages
that have been selected and summarized by us into 22 topic categories. The Snap
Directory enables a user to click on an entry and look through a hierarchy of
relevant Internet sites for various areas of interest. Our directory assists the
user by providing abstracts for each entry. The Snap Directory is hand built by
our editors, and we believe that searches through our directory return more
accurate results than searches through most of our competitors' mechanically
compiled directories. As of December 31, 1999, our directory contained over
660,000 entries.
Our LiveDirectory is a unique service that allows our members to submit
their Web sites and any other Web sites to our search and navigation service
quickly and easily. The LiveDirectory enables our members to monitor when
updates to their submitted Web sites occur and to determine the popularity of
such Web sites. The LiveDirectory is continually updated by the addition of new
sites by submitting members and ensures that our collection of searchable Web
sites remains up to date. The LiveDirectory is created and maintained through a
combination of GlobalBrain.net Inc.'s proprietary popularity ranking process and
by our editors, who choose the most popular and significant Web sites included
in the LiveDirectory for inclusion in the Snap Directory.
GLOBAL RESOURCES AND INFORMATION. We maintain direct links to MSNBC News,
MSNBC Sports and CNBC.com, which provide users with access to breaking news,
worldwide sports and financial information. Content from national news magazine
shows such as Dateline NBC is available via links to MSNBC.com, and users can
link to NBC's site devoted to the Olympics through NBC.com. We also offer a
platform to gather information from and interact with national and international
government agencies.
LOCAL AND PERSONALIZED CONTENT. The NBC-IN.com Web site serves as a portal
to a network of local news and information Web sites developed in collaboration
with 104 NBC-owned and
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NBC-affiliated television stations throughout the United States. When a user
identifies a particular city of interest, NBC-IN.com enables the user to connect
with the Web site of the local NBC-owned or NBC-affiliated station in that city.
On the local station Web sites connected by NBC-IN.com, users can access news,
sports and weather from MSNBC and, in the case of NBC affiliates, the local
station itself. Users can also access services such as job searching, local
advertising for real estate and automobiles, restaurant reviews and telephone
directories customized for the relevant geographic area. Information from local
government agencies is also available through our Web sites. Most of the content
appearing on the NBC-IN.com Web sites is obtained from unaffiliated content
providers, often through exclusive relationships with NBC-IN.com. The NBC-IN.com
network of station Web sites offers advertisers a city-by-city advertising
platform tailored to local needs with on-air and online cross-promotion,
anchored by the NBC brand. We provide a portion of each local site's content
through strategic relationships with Web sites such as Big Yellow, Auto-by-Tel
and CareerBuilder. These content providers pay a fee to NBC-IN.com to furnish
search or other functionality in a particular category such as auto and real
estate sales, apartment rentals, telephone directory services and job searching
services for the geographic areas covered by each site throughout the NBC-IN.com
site network. As subsidiaries of NBC, the 13 stations owned by NBC have
historically included all content furnished by NBC-IN.com on their Web sites,
but they are not presently under a written obligation to do so.
In addition to providing users local information through NBC-IN.com, we have
developed a number of personalization tools, integrated in the MySnap service,
that allow users to compile and format Internet content and advertising
information according to their specific interests. MySnap allows users to create
permanent filters for continually changing Internet-based information such as
stock quotes, weather and sports scores, compile linked news headlines in
selected categories, and access personalized locally-relevant information, such
as movie and television listings, simply by entering a zip code. MySnap also
offers e-mail and a reminder features with access to value-added Internet
content. MySnap seeks to complement our comprehensive search functionality by
positioning Snap.com and Snap.com For Higher Speed Users as a single source for
users' recurring information needs.
PERSONAL FINANCE INFORMATION. CNBC.com LLC, in which we own a 10% interest,
is an Internet financial information service developed by NBC in connection with
its CNBC cable television channel, one of the leading business and financial
news channels on television. CNBC.com seeks to leverage the CNBC cable brand to
become the leading Internet provider of comprehensive, real-time financial
information and analytic tools. CNBC.com also offers commentary and analysis
from CNBC.com editorial personnel, personal financial portfolio tracking, and
community features together with links to selected business news via MSNBC to
satisfy the full array of its users' financial information needs. CNBC.com plans
to feature subscription services and finance-related e-commerce services. CNBC
on-air personalities are featured on different areas of the Web site, to
contribute to the identification of CNBC.com with the CNBC cable brand.
UTILITY SERVICES
E-MAIL. We offer members free e-mail accounts that allow them to check
e-mail from anywhere at any time. The sophisticated e-mail service includes an
integrated spell-checker and filter that enables the user to easily choose to
receive only certain types of e-mails.
SEARCH ENGINE. Our search capability allows users to execute query-based
searches of the Web and other premium content databases or the Snap Directory. A
search can be effected using simple keywords, phrases or full text natural
language searches. In addition to its general search function, Snap.com also
offers users a more focused or "search only" service that allows for natural
language queries or special search expressions. Our exclusive license agreement
with GlobalBrain.net, Inc. for GlobalBrain.net's proprietary search technology,
enables our search engine
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to rank sites by user preferences and formulate a search response that reflects
the popularity and relevance of the sites to which the user is referred. The
GlobalBrain.net technology will also enable the customization of search results
for different user groups, by reflecting differences in preferences based on
country of residence, occupation, age or other variable we choose to set.
We have also created Snap "Guides to" resource centers to provide a
comprehensive, targeted first stop for searches in popular areas of interest on
Snap.com. Snap's resource centers serve as "mini-portals", delivering
intelligently compiled search results in over 500 niche areas of interest. In
addition, because our product managers can build resource centers and assemble
relevant content quickly, we have used resource centers to build search
capability opportunistically around topics of current interest as well as
contextual programming developed through our strategic relationship with NBC.
Resource centers provide full-service access to information sources as well as
to e-commerce opportunities, enabling users to commence and complete
transactions, from locating a source of information about a particular service
or product, to identifying appropriate providers, and finally to consummating a
transaction for the specific product or service needed.
WEB DEVELOPMENT TOOLS, HOME PAGES, DIGITAL STORAGE AND SOFTWARE
LIBRARIES. We offer Web development tools that allow our users to build
personal Web sites complete with the latest in Web page features such as
multimedia capabilities, counters that track and gather useful data about Web
site visitors, clip art and streaming video. In addition to providing tools to
build the Web sites, we also provide the digital storage that allows our members
to add their sites to the Internet. Members can also set up direct links to
their personal Web sites, allowing them to take advantage of our services
without the need to access our Web site directly. We also offer many free
downloadable software choices from our extensive free software library. Our
members rely on us to provide them with continually updated and expanded
software choices that further enhance their online experience. These services
strengthen our relationship with our members and incentivize them to provide the
valuable personal information that our advertisers and e-commerce partners use
to offer our members targeted products and services.
E-COMMERCE SERVICES
AUCTIONS. We offer our individual and business members the ability to sell
and buy goods via online auctions. Our service permits member sellers to list
items for sale, member buyers to bid on items of interest and users to browse
through listed items in a fully-automated, topically-arranged, intuitive and
easy-to-use online service that is available 24-hours-a-day, seven-days-a-week.
Our basic and advanced search capabilities are available for users of the
auction service to search for and identify items of interest. Non-member sellers
pay a nominal placement fee for an item based on the seller's minimum price for
the item. At the end of the auction period, if a bid exceeds the seller's
minimum price, we automatically notify the buyer and seller via email and then
the buyer and seller consummate the transaction independently of us. Buyers are
not charged for making bids or purchases through us. At no point during the
process do we take possession of either the item being sold or the buyer's
payment for the item. Following completion of a transaction, each user is able
to submit compliments or criticism to the trading profile of the seller. As we
continue to develop and refine our auction sites, we expect to build in many
more modern features that are a natural product extension, for example "group"
buying.
PRICE COMPARISON SHOPPING ENGINE. To assist members in their online
purchases we provide an online comparison shopping guide and purchasing service.
This service allows consumers to easily and quickly shop online for the products
they want at prices they desire. This technology also enables us to collect
valuable e-commerce related data about our online buyers, including information
about their preferences and purchase history. We use this data to better target
online buyers with products and services based on their individual needs. We
also provide a shopping service that brokers consumer transactions, serving as
an infomediary between online shoppers
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and more than 300 merchants, allowing consumers to easily and quickly compare
prices and shop online, without having to navigate through multiple merchant Web
sites. To enhance the shopping experience we also offer free, objective and
up-to-date reviews of top products in dozens of merchandise categories, provided
by Productopia, Inc., a third party product review service. Along with third
party reviews by Productopia, users of the comparison engine also have access to
unbiased merchant quality rankings from BizRate.com, a leading Internet merchant
rating site.
DATABASE MARKETING. We use the unique characteristics of the Web to
cost-effectively market products and services to our growing member base. We
believe we have created an innovative online sales channel with low customer
acquisition costs. We have gathered a significant base of information about our
members through registration information, responses to promotional campaigns and
purchasing information obtained from third parties. As more members join
Xoom.com and Snap.com, participate in our topical communities and use our other
free services, and as we obtain additional purchasing history data, the level of
information about our members will continue to grow. To become a member, a
visitor must provide a valid e-mail address as well as permission to be
re-contacted with targeted news and product offers by e-mail. We apply a
sophisticated direct e-commerce approach to generate product sales. Unlike
traditional direct marketing campaigns, which typically use paper-based
promotional materials delivered by mail, our campaigns use regular e-mails to
communicate offers to members, significantly reducing the cost of reaching the
consumer. The interactive nature of the Web enables us to present such offerings
in a more complete and dynamic manner than allowed by paper-based delivery
systems. Prior to introducing new product offerings to our entire membership
base, we select a subset of members for the purpose of test-marketing a
campaign. We have developed campaign-management software that uses statistical
techniques to analyze a test campaign and to predict the expected response rate
to such a campaign if it is rolled out to a larger group of members. We can also
analyze the effects of variations in price, graphics and copy. Results are
usually available in less than one day. On the basis of these tests, we select
product offers for a larger audience and modify them to maximize response rates,
sales, profitability and member retention. Testing also increases the accuracy
of our forecasts of product demand. As a result, we typically are able to carry
small amounts of inventory, thus lowering overhead and the risk of write-offs.
SHOPPING DIRECTORY. We offer our visitors and members a variety of shopping
opportunities through our shopping directory. We facilitate online transactions
by providing custom tailored buying opportunities for visitors and members and
enabling customers to easily buy products or services from a wide variety of
suppliers in a seamless, "one stop shopping" experience. In addition to offers
via e-mail, members may purchase products through various themed areas on the
Xoom.com and Snap.com Web sites such as Investor Place and Health & Fitness and
other sites controlled by us such as the Xoom.com shopping channel and, in the
future, SnapTV.com. Under our Buyer's Club, our partners allow us to offer their
users the ability to receive pre-approved direct e-mail offers from us. In
return, we offer to manage their e-mail databases, offer to share revenue from
product sales and offer our e-commerce solutions. We currently manage
approximately 2.5 million e-mail addresses and third party sites, including
Roxy.com, Talk City, Ulead Systems and NameSecure.com. In addition, we have
access to over one million other e-mail addresses from third party sites who
prefer to send these direct e-mail offers themselves. These partners include
BuyItNow, BuyONet.com and Mplayer.com, among others.
DIGITAL WALLET. Our My Wallet-TM- offering is a secure e-commerce solution
that allows our users to shop for various products from our sites and our
partner merchants in one easy transaction, which makes the shopping experience
more convenient and strengthens our relationship with the shopper. This digital
wallet is capable of storing multiple billing and shipping addresses as well as
credit card information in a safe and secure location. This allows consumers to
enter their personal
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data once and conveniently access it every time they make purchases, without
having to re-enter their information with each purchase.
BUSINESS PORTAL. We offer our small business users a variety of business
services, resources and e-commerce opportunities at our business portal located
at business.snap.com. This site offers services provided on other areas of our
Web sites but tailored for business users as well as co-branded services
provided by our partners. Services and resources available to business users at
our business portal include an online calendar and address book, free business
cards, assistance with developing a business plan and corporate credit cards.
BUSINESS DIRECTORY. Our global business directory provides a listing of
over seven million businesses in 250 countries. 750,000 of the businesses listed
in our directory have elected to become registered members. Membership enables
them to get a premier listing in our directory and provides them an opportunity
to receive targeted e-commerce product and service offers.
STRATEGIC ALLIANCES
NBC BRAND INTEGRATION AND LICENSE AGREEMENT. We have an agreement with NBC
that allows us to use the "NBC" trademark, multicolor logo and soundmark on our
Web properties. This will assist us in building our core brands and help us to
turn a large portion of the NBC television viewers into NBCi online members. The
license agreement licenses to us the exclusive right to use the Web site
addresses of NBC.com, VideoSeeker.com and NBC-IN.com, in connection with
interactive delivery of content from NBC's television programming. NBC retains
the title to such Web site addresses.
The license agreement also grants us an exclusive license to use, reproduce
and display on our Web sites short content from some NBC television programs.
Our agreement contains limited non-competition provisions restricting both
parties from competing with each other in some areas of business. For example:
- both parties are limited in their ability to authorize co-branding of any
of the their respective properties, products or services by a competitor
of the other;
- neither party can invest in, purchase or loan money to a competitor of the
other; and
- NBC has granted us first look rights in relation to acquisitions of our
non-primary competitors and related businesses.
The license agreement will continue in perpetuity unless terminated on
grounds set forth in the license agreement, including:
- by either party, if NBC or its subsidiaries no longer own at least 5% of
NBCi; or
- by NBC, in the event of a change of control of NBCi.
VALUEVISION/SNAPTV. To expand the market for our e-commerce services and
obtain direct access to the cable television audience, on September 13, 1999, we
entered into a strategic alliance with ValueVision International, Inc.,
consisting of re-branding and electronic commerce agreements, including
television home shopping, Internet shopping and direct e-commerce initiatives.
Under the terms of the agreements, Snap granted ValueVision a ten-year,
exclusive license to use Snap's "SnapTV" trademark for the purpose of operating
a television home shopping service and a Web site at www.snaptv.com in exchange
for a royalty of 2% of gross revenues received from Internet users in connection
with commerce opportunities on the SnapTV Web site. ValueVision's television
home shopping network, currently called ValueVision, will be re-branded as
SnapTV. The re-branding will be phased in during the first half of 2000. This
partnership is an
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important part of our strategy to gather members from various media sources and
become a fully integrated media company.
We will become the exclusive direct electronic commerce partner for SnapTV,
managing all such initiatives, including database management, e-mail marketing
and other sales efforts. Direct online shopping offers will include our products
and services, as well as SnapTV merchandise. ValueVision and NBCi will share
revenues from all such initiatives. ValueVision and Snap will roll-out a new
companion Internet shopping service, SnapTV.com, featuring online purchasing
opportunities that spotlight products offered on-air along with online-only
e-commerce opportunities offered by SnapTV and our merchant partners. In
addition, we have the exclusive right to sell all Internet advertising on
SnapTV.com and will retain 50% of the revenues generated from such advertising.
The SnapTV.com online store will be featured prominently within Snap.com's
shopping area.
CLEAR CHANNEL BROADCASTING. We have entered into an agreement with Clear
Channel Broadcasting, Inc. a globally diversified media and outdoor advertising
company, which operates, or is affiliated with over 500 radio stations
worldwide. The agreement provides that NBCi, through Xoom.com, will be the
exclusive provider of free Web site space, chat rooms and Web e-mail on 474
Clear Channel Web sites and that NBCi, through Snap.com, will be the premier
provider of search and directory services on all Clear Channel Web sites.
Although we can promote Xoom.com or Snap.com on the Clear Channel Web sites, we
cannot display the NBC brand. NBCi, through Xoom.com, also has the exclusive
right to send direct advertising and marketing offers to members associated with
the services provided by Xoom.com on the Clear Channel Web sites. Additionally,
we have agreed to purchase at least $3.5 million per year of advertising on the
Clear Channel radio network and billboards. This partnership broadens our reach
beyond the Internet and television into radio, thereby strengthening our
position as a truly integrated media company.
TELOCITY. In December 1999, we entered into a strategic partnership with
Telocity, Inc., a national broadband service provider, to bring "plug and play"
broadband Internet services to home residences. Under the agreement with
Telocity, we expect to provide a co-branded, high-speed Internet access service
to consumers by the third quarter of 2000. Under the agreement, we will also
promote Telocity's "plug and play" technology, a service that enables consumers
to obtain broadband services through the installation of a digital subscriber
line modem without additional telephone or computer equipment. This partnership
enables us to remain at the leading edge of broadband network growth and helps
position us as a dominant broadband content provider.
CNBC.COM. We currently own a 10% interest in CNBC.com and a subsidiary of
NBC owns the remaining ownership interests. CNBC.com is an online service that
provides financial information and analytic tools that is generated by CNBC and
other sources. Our equity interest is subject to restrictions against transfer
by us. Our equity interest has no governance rights with respect to CNBC.com
other than the right to vote such equity interest with respect to matters
requiring approval by a vote of equity holders of CNBC.com under the limited
liability company agreement of CNBC.com. However, as the indirect holder of the
remaining 90% interest in CNBC.com, NBC will have effective control over any
matters subject to approval by a vote of equity holders. In addition, in the
event that NBC assigns or transfers more than 50% of the equity interests in
CNBC.com to a third party, NBC may compel us to transfer our equity interest in
CNBC.com as well, and in some circumstances we may compel NBC to include our
equity interest in such a transfer by NBC. We also intend to enter into a
carriage agreement with CNBC pursuant to which CNBC will provide specific
services and some content from CNBC.com to NBCi.
In the normal course of business, we have entered into a number of strategic
alliances with a variety of online properties to increase the distribution of
our products and services, to obtain access to content and to provide our
members with access to unique services and technologies.
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MARKETING
Our strategy is to leverage the promotional reach of NBC to turn television
viewers into visitors and registered members. We intend to stimulate brand
awareness and user demand for our services through integrated marketing elements
including outdoor, television, radio and Internet advertising as well as
promotions and sponsorships. We also seek to leverage the marketing reach of our
distribution partners and content providers through a range of joint marketing
programs such as the SnapLENS initiative, which enables rapid creation of
customized versions of our Snap.com Web site. In addition, we cross-promote our
services with content providers though advertising swaps in both traditional and
online media.
We have also entered into distribution agreements with selected Internet
companies to increase our reach. For example, since February 1999, Snap.com has
been listed as a search and navigation serice on Netscape's Netcenter Web site
accessible via the "Internet Search" button, for which we pay Netscape a fee
based in part on the number of visits to Snap.com initiated through Netscape.
Netscape currently displays eight premier providers, including Snap.com, on an
equal placement basis, and has agreed to limit the total number of premier
providers to nine. Snap's agreement with Netscape has a term of one year,
expiring June 30, 2000.
ADVERTISING
We believe we can leverage our relationship with NBC to offer advertisers
cross-promotion capability by coordinating network advertising with a variety of
advertising opportunities on the NBCi Web sites. Through our relationship with
NBC, we have the ability to coordinate advertising strategies to reach NBC's
substantial broadcast and cable television viewing audience. In addition, the
capabilities of the Internet have increased advertisers' emphasis on tracking
users carefully to connect with audiences that fit specific buying profiles.
Targeted Internet advertising campaigns, through directory and channel
advertisements or keyword advertisements, provide opportunities to engage in
high response, product-specific advertising. In order to provide such audiences
to advertisers, services and sites must develop technologies to enable them to
conduct complex demographic profiling of consumers. We have developed a
registration methodology and underlying databases that enable us to
differentiate among users. Through user segmentation, we intend to continue to
provide highly targeted content selected by our editors in conjunction with
related e-commerce opportunities, increasing the effectiveness of advertising
messages.
We have a direct sales organization, located in New York and San Francisco,
that is dedicated to developing and maintaining close relationships with top
advertisers and leading advertising agencies nationwide. As of December 31,
1999, we had 74 employees in our direct sales organization. Our sales
organization is focused solely on selling advertising on all of our online
properties. Our sales organization consults regularly with advertisers and
agencies on design and placement of their Web-based advertising, provides
advertisers with advertising measurement analysis and focuses on providing a
high level of customer service and satisfaction.
Advertisers and advertising agencies typically enter into short-term
agreements, of an average of one to two months in duration, under which they
receive a guaranteed number of impressions, i.e., the number of times an
advertisement is seen by a user, for a fixed fee. We have experienced, and
expect to continue to experience, a variable renewal rate for our advertising
contracts. Advertising on our Web sites currently consists primarily of
banner-style advertisements that are prominently displayed at the top of pages
on a rotating basis throughout our Web site. From each banner advertisement,
viewers can directly access the advertiser's own Web site through a hyperlink,
thus providing the advertiser an opportunity to directly interact with an
interested customer.
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We have signed a number of long-term sponsorships of a minimum of six months
duration as a result of the growth in reach of our Web sites and the desire of
advertisers to reach our membership and user base. Such sponsorships generally
provide for specific placement on our online properties and the delivery of a
minimum number of impressions over the course of the contract. We have signed
such agreements with Job Options and NECX, among others.
ADVERTISING CUSTOMERS
During the nine months ended September 30, 1999, we had approximately 504
advertisers on our Web sites. For the nine months ended September 30, 1999, the
five largest advertising customers, Mail.com, BuyItNow.com, iVillage, iOwn and
InsWeb, accounted for approximately 24% of pro forma advertising revenue
(approximately 19% of total net revenue). The following is a list of our top 15
advertising customers by net revenue for the nine months ended September 30,
1999:
AutoTrader.com LLC
BuyItNow.com, LLC
HealthAxis.com, Inc.
Hearst Communications, Inc.
InsWeb Corporation
Intel Corporation
iOwn, Inc.
iVillage, Inc
JobOptions, LLC
LendingTree, Inc.
Mail.com, Inc.
NECX Direct LLC
NextCard, Inc.
Preview Travel
Tower Records.com
CUSTOMER SERVICE AND SUPPORT
We believe that the strength of our customer service and technical support
operations is critical to our success in maintaining our membership base,
increasing membership and encouraging repeat usage and purchases. We have
established a team of customer service and technical support professionals who
process inquiries and monitor the status of orders, shipments and payments,
operating from 7 a.m. to 6 p.m. Pacific time Monday through Friday. Members can
access customer service by e-mail and through a toll-free telephone number. We
intend to enhance and automate the e-mail response portions of our customer
service and technical support operations in the near future.
TECHNOLOGY AND INFRASTRUCTURE
We use Exodus Communications, Inc. and GlobalCrossing Global Center to house
our network servers and to provide and manage power and maintain the correct
environment for their networking and server equipment. We intend to standardize
our network and mail platforms between our principal and satellite offices. In
addition, we will seek to standardize the hardware and software used by our
various businesses by making purchases through a select group of vendors. We do
not presently expect to incur any material costs due to the consolidation of
vendor and supplier relationships. We will continue to strive to rapidly develop
and deploy high-quality tools and features into our systems without interruption
or degradation in service. In addition, we will continue to upgrade and expand
our server and networking infrastructure in an effort to ensure fast and
reliable access to our Web sites.
We have developed an open standard hardware and software system that is
designed for reliability. Our system architecture is based on a distributed
model that is highly scalable, flexible and modular, emphasizing extensive
automation and a high degree of redundancy that is designed to minimize single
points of failure. The system integrates site management, network monitoring,
quality assurance, transactions processing and fulfillment services. Currently,
the system has 2.5 terabytes of unformatted disk space and has a peak bandwidth
of over 300 megabits per second.
We also use third-party and public domain server software that we have
optimized internally, and internally developed tools and utilities. Requests for
files are distributed to the appropriate
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servers using load distribution and balancing hardware. We also employ in-house
monitoring software that includes automated diagnostic programs and intelligent
agents that test and measure system response, create reports for evaluation by
technical staff and generate pager calls in the event of system failures.
Additional software monitors abuse of the site by members and potential hackers.
Reporting and tracking systems generate daily membership, order and campaign
reports. Membership and mailing engines allow for efficient deployment of member
data and targeting of e-mail campaigns.
We store member-generated content on a redundant array of independent disks.
We store member profile information on multiple disk arrays using Oracle and
Sybase database software and back it up on long-term tape storage devices on a
daily basis. We will continue to upgrade and expand our server and networking
infrastructure in an effort to maintain and improve fast and reliable access to
our Web sites and communities. Any system failure that causes an interruption in
service or a decrease in responsiveness of our Web sites could result in less
traffic on the Web site and, if sustained or repeated, could impair our
reputation and the attractiveness of our brands.
Exodus and GlobalCrossing Global Center connect our Web sites to the
Internet via multiple links on a 24 hour-a-day, seven days per week basis.
Exodus and GlobalCrossing Global Center also provide and manage power and
maintain the correct environment for our networking and server equipment. We
manage and monitor servers and networks remotely from our headquarters in San
Francisco, California. We strive to rapidly develop and deploy high-quality
tools and features into our system without interruption or degradation in
service. Any disruption in the Internet access provided by Exodus or
GlobalCrossing Global Center, or any interruption in the service that Exodus or
GlobalCrossing Global Center receives from other providers, or any failure of
Exodus or GlobalCrossing Global Center to handle higher volumes of Internet
users to our Web sites could have a material adverse effect on our business,
results of operations and financial condition.
We developed our current search engine technology based on a collection of
third party licensed proprietary tools. Our engineers developed an enhanced
search technology to offer an approach to information retrieval that provides
users enhanced levels of accuracy, relevancy, comprehensiveness and speed. Our
search engine includes built-in ranking algorithms with search features geared
toward advanced users, accessing producer-selected content from over 100 leading
Web publishers and information from over 300,000 third party Web sites while
utilizing Inktomi's index of over one hundred million Web pages to provide a
comprehensive and seamless search experience. Our search results are enhanced by
the GlobalBrain.net proprietary search technology that enables our search engine
to rank sites by user preferences, formulate search responses reflecting the
popularity of Web sites and customize search results for specific user groups.
Our search engine seeks to deliver relevant search results, emphasizing high
precision and recall functionality in responding to user queries. In addition,
due to the dynamic nature of the Internet, the retrieval of up-to-date
information has become another key factor for the evaluation of Internet search
services. To bring current information to the user, our producers continually
refresh Snap's database of Web pages and regularly update the database with new
Web pages. For every search, our innovative response compilation technology
allows the importation of producer-selected data collections into our system and
gives users ready access to highly relevant results via targeted links to
related Web site addresses.
We have no fulfillment operation or warehouse facility of our own, and
currently rely primarily on Banta for warehousing and fulfillment services. We
use automated interfaces for accepting, sorting and processing orders to enable
us to achieve the most rapid and economical purchase and delivery terms. We
process approximately 95% of orders online, with the remainder by telephone, fax
or mail.
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COMPETITION
The market for our products and services continues to develop and rapidly
evolve and is characterized by an increasing number of market entrants with
competing products and services. We expect that competition will continue to
intensify with brand name recognition becoming an increasingly important
competitive factor. To achieve brand name recognition, Internet companies are
consolidating a broad array of products and services under a single brand. For
example, recently a number of significant acquisitions and strategic plans have
been announced involving some of our competitors, including:
- America Online's acquisition of Netscape and its proposed merger with Time
Warner, Inc.;
- CMGI's acquisition of 83% of AltaVista;
- Disney's acquisition of the remaining interest in Infoseek not already
owned by Disney;
- @Home Network's acquisition of Excite; and
- Yahoo!'s acquisitions of GeoCities and Broadcast.com.
These acquisitions and proposed strategic relationships will result in more
formidable competitors, some of whom are aligned with other media companies.
A number of companies offer competitive products and services addressing
many of our target markets. These companies include Yahoo! (including GeoCities
and Broadcast.com), America Online (including AOL.com, Netcenter and ICQ), Alta
Vista, Excite@Home, Disney (including the Go Network, which is jointly operated
with Infoseek), Lycos (including Hotbot and Tripod) and Microsoft (including
msn.com). In addition, our businesses will compete directly with a great number
of other Internet sites and other media companies across a wide range of
different online services with advantages in expertise, brand recognition and
other factors. For example we will compete with other community Web sites such
as theglobe.com and iVilllage, content Web sites such as ESPN.com and local
content Web sites such as Ticketmaster Online-CitySearch.
We also expect intense competition in the e-commerce market from an
ever-increasing number of companies selling goods and services over the
Internet, particularly goods and services that relate to the use of computers.
These competitors include Amazon.com, Egghead's Egghead.com and CompUSA.
We believe the principal factors upon which we will compete will be brand
name recognition and our ability to offer advertisers and e-commerce partners a
large user and membership base. In addition to brand name recognition, our
ability to increase our user and membership base will be dependent upon our
ability to differentiate ourselves by the quality and variety of our product and
service offerings, including the variety and depth of content offered on our
online properties. Our ability to attract users is also dependent upon strategic
alliances and distribution relationships we enter into. We believe the breadth
and quality of our service and product offerings, including our broadband
capabilities and our large and varied membership base, together with our
relationship with NBC, will enable us to effectively compete with our
competitors.
INTELLECTUAL PROPERTY AND PROPRIETARY RIGHTS
We view our technology as proprietary and will try to protect it under
existing United States and international laws relating to protection of
intellectual property. We have developed internal procedures to control access
and dissemination of our proprietary information. Despite our precautions, third
parties may succeed in misappropriating our intellectual property or
independently developing similar intellectual property. Protecting our
intellectual property against
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infringement could result in substantial legal and other costs and could divert
our limited management resources.
Some of our technology is based on technology licensed from third parties.
As we introduce new services, we may need to license additional technology. If
we are unable to license needed technology on a timely basis and on commercially
reasonable terms, we could experience delays and reductions in the quality of
our services, all of which could adversely affect our business and results of
operations. Our reputation and the value of our proprietary information could
also be adversely affected by actions of third parties to whom we license our
proprietary information and intellectual property. If someone asserts a claim
relating to proprietary technology or information against us or our
subsidiaries, we may seek licenses to such intellectual property. We cannot
assure you, however, that we could obtain these licenses on commercially
reasonable terms, if at all. The failure to obtain the necessary licenses or
other rights could have a material adverse effect on our business and results of
operations.
Although we do not believe our businesses infringe the proprietary rights of
any third parties, we cannot assure you that third parties will not assert
claims against us in the future. From time to time, our businesses have been
subject to claims of alleged infringement of intellectual property rights of
others on the basis of the actions of such businesses and the content generated
by their members and users. These categories of claims, whether or not
meritorious, could result in litigation and become a drain on our management and
financial resources. If successful, claims of this nature could subject us to
liability, injunctive relief restricting our use of intellectual property
important to our operations, and could ultimately cause us to lose rights to
some of our intellectual property. Any of these events could have a material
adverse effect on our business and results of operations.
LEGAL PROCEEDINGS
As a recently formed company, NBCi is not subject to any pending or
threatened litigation. NBCi's operations and financial performance, however, may
be affected by pending litigation against Xoom.com and Snap or our other
subsidiaries or online properties.
Zoom Telephonics, Inc. filed a lawsuit against us in September 1998 in the
United States District Court for the District of Massachusetts alleging
trademark infringement and related statutory violations. We were not served with
Zoom Telephonics' complaint until January 1999. Zoom Telephonics has demanded
that we stop using the Xoom.com trademark and has asked for an unspecified
amount of money damages. We responded to the complaint in February 1999. In
April 1999, Zoom Telephonics filed a motion for preliminary injunction to stop
us from using any mark containing "Xoom". We have filed a motion to oppose Zoom
Telephonics' motion for preliminary injunction. A hearing on the motion was held
on September 30, 1999. On October 7, 1999 the court denied Zoom Telephonics'
motion for a preliminary injunction but allowed Zoom Telephonics to request the
court to reconsider the motion if the Xoom.com merger did not close by
October 31, 1999. On November 3, 1999, Zoom Telephonics filed a motion to renew
their previous motion for preliminary injunction. On November 17, 1999 we filed
an opposition to Zoom Telephonics' motion to renew its previous motion for a
preliminary injunction. We believe that the claims asserted by Zoom Telephonics
are without merit and we intend to defend against them vigorously. We cannot
assure you, however, that the results of this litigation will be favorable to
us. An adverse result of the litigation would likely seriously harm our business
and results of operations, particularly if the litigation forces us to make
substantial changes to our name and trademark usage. Any name change could
result in confusion to customers and investors, which could adversely affect the
results of our operations and the market price of the common stock.
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In January 1998, we became aware that Imageline, Inc. claimed to own the
copyright in certain images that a third party, Sprint Software Pty Ltd had
licensed to us. Some clip art images that Imageline alleged infringed
Imageline's copyright were included by us in versions of our Web Clip Empire
product and licensed by us to third parties, including other software clip
publishers. Our contracts with such publishers require us to indemnify the
publisher if copyrighted material licensed from us infringes a copyright.
Imageline claims that our infringement of Imageline's copyrights is ongoing. We
engaged in discussions with Imageline, but were unable to reach any agreement
regarding a resolution of this matter. On August 27, 1998, we filed a lawsuit in
the United States District Court for the Eastern District of Virginia against
Imageline, certain parties affiliated with Imageline, and Sprint Software
regarding our and our licensees' alleged infringement of Imageline's copyright
in certain clip art that we licensed from Sprint Software. The lawsuit seeks,
among other relief, disclosure of information from Imageline concerning the
alleged copyright infringement, a declaratory judgment concerning the validity
and enforceablilty of Imageline's copyrights and copyright registrations, a
declaratory judgment regarding damages, if any, owed by us to Imageline, and
indemnification from Sprint Software for damages, if any, owed by us to
Imageline. There is no contractual limitation on Sprint Software's
indemnification. While we are seeking indemnification from Sprint Software for
damages, if any, we cannot assure you Sprint Software will be able to fulfill
the indemnity obligations under its license agreements with us. In addition, we
may be subject to claims by third parties seeking indemnification from us in
connection with the alleged infringement of the Imageline copyrights. On
September 17, 1998, Imageline filed a counterclaim, which Imageline amended in
January 1999, seeking up to $60.0 million in damages. In March 1999, the parties
completed the discovery process and filed separate motions for summary
judgement. On April 5, 1999, the court granted one of our motions for partial
summary judgment and stayed the case to allow Imageline to file all necessary
copyright registration applications to cover the clip art images. Based on the
discussions with Imageline, we believe the range of liability related to this
matter is from $0 up to $10,000,000; however, we believe it is unlikely that the
liability would exceed $1,000,000. Accordingly, we reserved $1,000,000 for this
potential liability, the expense of which was included in non-recurring charges
for the year ended December 31, 1997. We believe that the $1,000,000 reserve
represents a reasonable estimate of the loss that could be incurred in the
Imageline dispute. Based on information available to date, management does not
believe that the outcome of this matter will seriously harm our financial
position, results of operations and cash flows over and above the $1,000,000
accrued in the 1997 financial statements. If not successful in defending this
claim, the resulting outcome could seriously harm our business, results of
operations, cash flows and financial condition.
John G. Balletto filed a lawsuit against us in September 1999 in the San
Francisco Superior Court alleging breach of contract and seeking specific
performance. Mr. Balletto has alleged that in connection with a loan which we
obtained from Sand Hill Capital LLC in 1998 and pursuant to an oral contract
with Xoom.com, he is entitled to a finder's fee. Mr. Balletto has sought
specific performance of the alleged oral contract by having the court direct us
to issue 33,784 shares of our common stock to Mr. Balletto and such other relief
as the court may deem just and proper. We believe that this lawsuit is without
merit and intend to defend this lawsuit vigorously.
We filed a complaint against CityAuction, Inc. and Ticketmaster
Online-CitySearch Inc. in March 1999 in connection with an agreement entered
into between Snap and CityAuction to promote CityAuction's online auction site
in exchange for monetary compensation and warrants to purchase shares of
CityAuction. This matter is presently pending in Superior Court in San
Francisco, California. We are claiming that CityAuction breached the agreement
by refusing to honor our exercise in February 1999 of our CityAuction warrants,
failing to make a $125,000 payment due to us and failing to provide us with
notice of CityAuction's pending acquisition by Ticketmaster
Online-CitySearch, Inc. We are also claiming that Ticketmaster induced
CityAuction to breach its contractual obligations to us. We are seeking damages,
injunctive and equitable relief of
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not less than $5 million from CityAuction, in addition to damages from
Ticketmaster Online-CitySearch Inc. for intentional interference with the
Snap-CityAuction agreements. CityAuction has filed a cross-complaint against us
seeking rescission of its promotion agreement with us, restitution of not less
than $125,000 and unspecified damages. This matter is in the discovery stage. An
unfavorable outcome in this litigation would deny us the economic benefit of the
claimed payments and stock ownership of CityAuction.
EMPLOYEES
As of December 31, 1999, we had approximately 635 full-time employees. Our
future success will depend, in part, on our ability to continue to attract,
retain and motivate highly qualified technical and management personnel, for
whom competition is intense. From time to time, we will employ independent
contractors to support our research and development, marketing, sales and
support and administrative organizations. Our employees are not covered by any
collective bargaining agreement.
FACILITIES
Our headquarters are currently located in a leased facility in San
Francisco, California, consisting of approximately 9,000 square feet of office
space, which is under a lease that expires in July 2004. We lease additional
office space in San Francisco, consisting of approximately 97,000 square feet,
which is under a lease that expires in April 2000. On or about March 2000 we
intend to move our headquarters and consolidate all currently leased San
Francisco office space to a leased facility in San Francisco, consisting of
approximately 187,000 square feet of office space, which is under a lease that
expires in 2010. We lease approximately 5,000 square feet of office space in Los
Angeles, California for a sales office under a lease that expires November 2004.
We also lease approximately 6,500 square feet of office space in New York, New
York for our East Coast sales offices under a lease that expires July 2004. In
addition, our wholly-owned subsidiary Liquid Market leases approximately 10,500
square feet of office space in Los Angeles, California, which is under a lease
that expires December 2004.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth information regarding our directors,
executive officers and key employees as of December 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------------------- --------- --------------------------------------------------
<S> <C> <C>
Robert C. Wright................................ 56 Chairman of the Board and Class B Director
Chris Kitze..................................... 40 Chief Executive Officer and Class A Director
John Harbottle.................................. 45 Chief Financial Officer and Executive Vice
President, Finance, Secretary and Treasurer
Edmond P. Sanctis............................... 37 President and Chief Operating Officer
Alan Braverman.................................. 38 President, Business to Business
Shawn Hardin.................................... 37 Executive Vice President, Product and Executive
Producer
John McMenamin.................................. 45 Executive Vice President, Sales and Marketing
Kenneth S. Norton............................... 28 Chief Technology Officer
Jeffrey Ballowe................................. 44 Class A Director
Robert C. Harris, Jr............................ 53 Class A Director
James Heffernan................................. 58 Class A Director
Michael M. Lynton............................... 39 Class A Director
L. Lowry Mays................................... 64 Class A Director
Philip Schlein.................................. 65 Class A Director
Mark W. Begor................................... 41 Class B Director
Gary M. Reiner.................................. 45 Class B Director
Scott M. Sassa.................................. 40 Class B Director
John F. Welch, Jr............................... 64 Class B Director
Martin J. Yudkovitz............................. 45 Class B Director
KEY EMPLOYEES
Diane Cordova................................... 38 Senior Vice President, Human Resources
Marc Sznajderman................................ 33 Senior Vice President, Corporate Development
</TABLE>
ROBERT C. WRIGHT has served as our Chairman of the Board and as a member of
our board of directors since November 1999. Mr. Wright has been the President
and Chief Executive Officer of NBC since September 1986. Prior to joining NBC,
Mr. Wright was President of General Electric Financial Services from April 1984
to August 1986, head of GE's housewares and audio division from May 1983 to
April 1984, and President of Cox Cable Communications from January 1980 to April
1983. Mr. Wright serves on the board of directors of the Motion Picture and
Television Fund Corporation and the board of trustees of the Museum of
Television and Radio and the American Film Institute, and is an honorary trustee
of the Foundation of American Women in Radio and Television. Mr. Wright received
his A.B. from the College of the Holy Cross and his L.L.B. from the University
of Virginia School of Law.
CHRIS KITZE has been a member of our board of directors since May 1999 and
has served as our Chief Executive Officer since November 1999. From May 1999 to
November 1999, Mr. Kitze served as our President. Mr. Kitze co-founded Xoom.com
and has served as its Chairman of the Board since that time and Secretary since
that time until April 1999. Since December 1996,
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Mr. Kitze has been an independent investor. From April 1996 until December 1996,
Mr. Kitze also served as Xoom.com's President and Chief Executive Officer. In
June 1995, Mr. Kitze co-founded Point Communications Corporation, a Web
directory company, which was acquired by Lycos in October 1995, after which
Mr. Kitze served as Lycos' Vice President of Marketing until June 1996. From
June 1994 until June 1995, Mr. Kitze served as Publisher at Softkey
International, now The Learning Company. In September 1991, Mr. Kitze co-founded
Aris Entertainment, a CD-ROM publishing company and served as its President
until June 1994. Mr. Kitze holds a B.S. in Chemical Engineering from the
University of Colorado.
JOHN HARBOTTLE has served as our Executive Vice President, Finance, Chief
Financial Officer, Secretary and Treasurer since August 1999 and as Xoom.com's
Vice President, Finance and Chief Financial Officer since August 1998 and as
Xoom.com's Secretary since April 1999. From February 1996 to February 1998,
Mr. Harbottle was the Vice President of Finance and Chief Financial Officer of
Mastering Computers, Inc., an information technology training and CBT software
development and manufacturing company, and then worked as an independent
consultant for Mastering Computers, Inc. from February 1998 to July 1998. From
October 1994 to February 1996, Mr. Harbottle was the Vice President of Finance
and Chief Financial Officer of Zenger-Miller, an international
management/leadership training, consulting and education company. From January
1992 to October 1994, Mr. Harbottle was the Vice President of Finance and Chief
Financial Officer of IFS, an international consumer products and direct
marketing company. Mr. Harbottle holds a B.S. in Business Administration from
the University of California, Berkeley.
EDMOND P. SANCTIS has served as our President and Chief Operating Officer
since November 1999 and has served as Chief Operating Officer of Snap since July
1998. From 1996 to July 1998, Mr. Sanctis was Senior Vice President and General
Manager of NBC Multimedia, Inc., a wholly owned subsidiary responsible for NBC's
Internet and new technology operations. From 1993 to 1996, Mr. Sanctis held
various management positions at NBC, including General Manager of NBC Digital
Productions and Manager of Cable and Business Development. Mr. Sanctis has also
been a Communications Associate for Sony USA and previously worked as a
television news reporter. Mr. Sanctis holds a B.S. in Journalism from the
University of Maryland and an M.B.A. from Columbia University.
ALAN BRAVERMAN has served as our President, Business to Business since
December 1999. From April 1999 to December 1999, Mr. Braverman worked at Banc of
America Securities and held the position of Senior Managing Director and Head of
Internet Research. From July 1998 to April 1999, Mr. Braverman was Managing
Director and Head of Internet Research at Deutsche Bank Securities, the
investment banking arm of Deutsche Bank Group. From July 1996 to July 1998, he
was the senior Internet analyst at Credit Suisse First Boston. From 1995 to July
1996, Mr. Braverman was Vice President, Internet Analysis at Haniser Imhoff.
From 1991 to 1995, Mr. Braverman served as a senior executive at U.S. West as
well as General Manager for CityKey Online, where he oversaw the national
roll-out for the company's online business. Mr. Braverman earned a B.B.A. in
finance and strategy from The Wharton School of the University of Pennsylvania
and a M.B.A. in finance, strategy and marketing from Northwestern University's
Kellogg Graduate School of Management.
SHAWN HARDIN has served as our Executive Vice President, Product and
Executive Producer since November 1999 and has served as Senior Vice President
of Snap since July 1998. Beginning in July 1996 until June 1998, Mr. Hardin
served as the Vice President and Executive Producer of NBC Multimedia, Inc., a
wholly owned subsidiary responsible for NBC's Internet and new technology
operations. Prior to this, from July 1995 to June 1996, he served as Creative
Director of NBC Multimedia, Inc. From July 1994 to June 1995, Mr. Hardin was the
Supervising Producer and Creative Director of a technology and programming
division at NBC known as NBC-2000. Prior to joining NBC, Mr. Hardin operated his
own business where he worked on more than seventy
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productions including features, shorts, commercials, music videos and a variety
of Interactive Media projects. Mr. Hardin has a B.A. from the University of
Southern California, School of Cinema/ Television. In January 1995, Mr. Hardin
filed for personal bankruptcy resulting from personal debt incurred through
financing multiple film and video projects.
JOHN MCMENAMIN has served as our Executive Vice President, Sales and
Marketing since December 1999. From June 1999 to December 1999, Mr. McMenamin
served as Vice President General Manager of Sponsorship for iVillage.com. From
December 1997 to August 1998, Mr. McMenamin served as President and Chief
Executive Officer of C3 Communications, Inc., an interactive media company. From
1991 through 1997, Mr. McMenamin served in various positions at Time
Warner/Turner and most recently held the position of President of Turner Private
Networks. Mr. McMenamin holds an M.B.A. and certificate degree in business law
from the Stillman Graduate School of Business Administration at Seton Hall
University and a B.A. from St. Anselm's College.
KENNETH S. NORTON has served as our Chief Technology Officer since November
1999 and has served as Vice President of Technology of Snap since August 1998.
From July 1996 to August 1998, Mr. Norton was Director of Software Engineering
at CNET where he was the original chief architect of the Snap.com service and
the lead designer of the SnapLENS architecture. Beginning in November 1993 until
January 1996, Mr. Norton developed transaction-processing software at Softbank
Services Group, a high technology outsourcing company. He sits on the Advisory
Committee of the World Wide Web Consortium and is a member of the Association
for Computing Machinery and the Institute of Electrical and Electronics
Engineers. Mr. Norton has a B.A. with honors from Boston University and is
certified as a Project Management Professional by the Project Management
Institute.
JEFFREY BALLOWE has served as a member of our board of directors since
November 1999 and has served as a director of Xoom.com since July 1998.
Mr. Ballowe retired at the end of 1997 from Ziff-Davis, where during his
11 years at the company he was instrumental in transforming Ziff-Davis from a
U.S. magazine publisher to an international, integrated media company. After
serving in magazine publishing roles including Publisher of PC Magazine,
Mr. Ballowe held a number of corporate posts in which he was responsible for
establishing Ziff-Davis European operations, managing Ziff-Davis' largest
magazine group, launching the company's Internet publications, creating ZDNet,
and launching ZDTV. At his retirement he was President, Interactive Media and
Development Group, in charge of Ziff-Davis' Internet publications, ZDNet, ZDTV,
and all development at the company. His development activities included
spearheading Ziff-Davis' and Softbank's investments in Yahoo!, USWeb
Corporation, where he served as a founding director, Gamespot, and Herring
Communications. Mr. Ballowe is currently the President of the not-for-profit
Electronic Literature Organization. Currently Mr. Ballowe is Chairman of
deja.com, Inc. and serves on the boards of drkoop.com, Jupiter Communications,
Inc., Onvia.com Inc., VerticalNet and ZDTV. He received a bachelor's degree from
Lawrence University, a master's degree in French from the University of
Wisconsin-Madison, and an M.B.A. from the University of Chicago.
ROBERT C. HARRIS, JR. has served as a member of our board of directors
since November 1999 and has served as a director of Xoom.com since August 1998.
Mr. Harris is a Senior Managing Director at Bear, Stearns & Co. Inc. From 1989
to October 1997, he was a co-founder and Managing Director of Unterberg Harris.
From 1984 to 1989, he was a General Partner, Managing Director and Director of
Alex. Brown & Sons Inc. Mr. Harris is also a director of MDSI Mobile Data
Solutions, Inc. and SoftNet Systems, Inc. Mr. Harris holds a B.S. and M.B.A.
from the University of California at Berkeley.
JAMES HEFFERNAN has served as a member of our board of directors since
November 1999 and has served as a director of Xoom.com since June 1998.
Mr. Heffernan co-founded USWeb Corporation, an Internet professional services
company, in December 1995 and served as its
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Executive Vice President, Chief Financial Officer, Secretary and as a director
until May 1998. From May 1993 to July 1994, he worked as an independent
consultant and then joined Interlink Computer Sciences, Inc. in July 1994 as
Chief Financial Officer, where he served until December 1995. From March 1992 to
May 1993, Mr. Heffernan served as Chief Financial Officer and Chief Operating
Officer of Serius. Mr. Heffernan has also served as an officer of several other
technology companies, including Software Publishing Corp., Zital Inc. and
Measurex Corp. Mr. Heffernan has a B.S. in Business and an M.B.A. from Santa
Clara University.
MICHAEL M. LYNTON has served as a member of our board of directors since
November 1999 and has been the Chairman and Chief Executive Officer of the
Penguin Group since 1996. From 1987 to 1996, Mr. Lynton was President of
Hollywood Pictures and President of Disney Publishing--Magazines and Books at
The Walt Disney Company. Mr. Lynton is a director of Marvel Enterprises, Inc.
and of Telebanc Financial Corporation. Mr. Lynton received an A.B. in History
and Literature from Harvard, and an M.B.A. from Harvard Business School.
Mr. Lynton is the unaffiliated director jointly nominated by NBC and Xoom.com.
L. LOWRY MAYS has served as a member of our board of directors since
November 1999 and has served as a director of Xoom.com since October 1999. In
1972, Mr. Mays founded Clear Channel Communications, a diversified media
company, and has served as its Chairman, Chief Executive Officer and a director
since 1972. From 1972 to February 1997 Mr. Mays served as the President of Clear
Channel Communications. Mr. Mays has a B.S. in Petroleum Engineering from Texas
A&M University and an M.B.A. from Harvard Business School.
PHILIP SCHLEIN has served as a member of our board of directors since
November 1999 and has served as a director of Xoom.com since July 1998. Since
April 1985, Mr. Schlein has been a partner of U.S. VenturePartners, a venture
capital firm specializing in retail and consumer products companies. From
January 1974 to January 1985, Mr. Schlein served as President and Chief
Executive Officer of Macy's California, a division of R. H. Macy & Co., Inc., a
department store chain. Mr. Schlein also serves on the board of directors of
Ross Stores, Inc., QRS Corporation and Burnham Pacific Properties, Inc.
Mr. Schlein holds a B.S. in Economics from the University of Pennsylvania.
MARK W. BEGOR has served as a member of our board of directors since
November 1999 and has been Executive Vice President and Chief Financial Officer
of NBC since April 1998, responsible for NBC's global finance, accounting, tax
and information technology activities. Mr. Begor began his career with GE in
1980, holding various financial positions in GE and GE Plastics, including
Manager-Finance and Business Development for GE Plastics Pacific in Singapore,
before being named General Manager of GE Plastics' Global Sourcing and
Petrochemicals operations in October 1993. From August 1995 to March 1998,
Mr. Begor served as GE's Manager of Investor Communications and was appointed a
corporate officer of GE in December 1996. Mr. Begor is a member of the board of
managers of Snap and a director of ValueVision International, Inc. Mr. Begor
received his B.S. from Syracuse University and his M.B.A. from Rennselaer
Polytechnic Institute.
GARY M. REINER has served as a member of our board of directors since
November 1999 and is Senior Vice President and Chief Information Officer of GE.
Mr. Reiner joined GE in 1991 as Vice President-Corporate Business Development,
and assumed his current position in April 1996. Mr. Reiner leads GE's
information technology efforts. Mr. Reiner received his B.A. from Harvard and
earned an M.B.A. from Harvard Business School.
SCOTT M. SASSA has served as a member of our board of directors since
November 1999 and has been President, NBC West Coast, since May 1999. Mr. Sassa
joined NBC in September 1997 as President of its Television Stations Division,
and was promoted to President of NBC Entertainment in October 1998. From
November 1996 to August 1997, Mr. Sassa was President and
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Chief Operating Officer of Andrews Group, a unit of MacAndrews & Forbes Holding
Co., and was also Chief Executive Officer of Marvel Entertainment. Prior to
joining Andrews Group, Mr. Sassa was President of Turner Entertainment Group, a
division of Turner Broadcasting System, from September 1990 to November 1996.
Mr. Sassa is a member of the board of managers of Snap.
JOHN F. WELCH, JR. has served as a member of our board of directors since
November 1999 and has been Chairman of the Board and Chief Executive Officer of
GE since 1981. A 1957 graduate of the University of Massachusetts with M.S. and
Ph.D. degrees from the University of Illinois, Mr. Welch joined GE in 1960.
Following managerial assignments in GE's plastics, chemical and metallurgical
businesses, he was elected a Vice President in 1972. In 1973, he was named Vice
President and Group Executive of the Components and Materials Group. He became a
Senior Vice President and Sector Executive of the Consumer Products and Services
Sector in 1977, and was elected a vice chairman and named an executive officer
of GE in 1979.
MARTIN J. YUDKOVITZ has served as a member of our board of directors since
November 1999 and has been President of NBC Interactive Media since December
1995. Mr. Yudkovitz is responsible for developing NBC's new media strategy and
managing NBC's interactive operations. From December 1993 to December 1995,
Mr. Yudkovitz served as Senior Vice President of NBC Multimedia, and in addition
was appointed Senior Vice President of Strategic Development of NBC in March
1993. He has also served as General Counsel and Vice President for Business
Affairs of CNBC. Mr. Yudkovitz joined NBC in 1984. Mr. Yudkovitz is a director
of iVillage, Inc. and Talk City, Inc., as well as a member of the board of
managers of Snap. Mr. Yudkovitz holds a B.A. from Rutgers University and
received his J.D. from Columbia Law School.
DIANE CORDOVA has served as our Senior Vice President, Human Resources since
January 2000, as Vice President, Human Resources from November 1999 through
December 1999 and has served as Vice President of Human Resources of Snap since
September 1998. From April 1997 to September 1998, Ms. Cordova served as
Director of Human Resources for Imagine Media, Inc., a publisher of interactive
entertainment and technology magazines and Web sites. Beginning in April 1992
until April 1997, Ms. Cordova served as Senior Manager of Human Resources for
Xerox Corp., where she was a founding member of a startup division spun out of
Xerox's Palo Alto Research Center. From 1990 until she joined Xerox,
Ms. Cordova was the Senior Human Resources Manager at Conner Peripherals, a hard
disk drive manufacturer in San Jose, California.
MARC SZNAJDERMAN has served as our Senior Vice President, Corporate
Development since January 2000, as Vice President, Corporate Development from
November 1999 through December 1999 and served as a member of our board of
directors from May 1999 to November 1999. Mr. Sznajderman has served as
Xoom.com's Vice President, Corporate Development since December 1998. From
August 1993 until November 1998, Mr. Sznajderman served as a member of the
Investment Banking Division of Bear, Stearns & Co. Inc., most recently as Vice
President. Prior to joining Bear Stearns, Mr. Sznajderman served as Vice
President of Business Development for Qantix Corporation, a manufacturer and
marketer of computer accessories, from August 1991 until June 1993. From August
1989 until July 1991, Mr. Sznajderman was a member of the Investment Banking
Division of Goldman, Sachs & Co. Mr. Sznajderman holds a B.S. in Finance from
Syracuse University and a Masters in Management from the J.L. Kellogg Graduate
School of Management at Northwestern University.
BOARD COMPOSITION
Under our certificate of incorporation, so long as there are shares of our
Class B common stock outstanding, our board of directors will consist of 13
directors. The holders of our Class A common stock and Class B common stock are
entitled to elect a designated number of directors dependent upon the percentage
of outstanding common stock each class owns. See "Description
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of Capital Stock--Governance Rights Set Forth in Our Certificate of
Incorporation and Bylaws." Directors elected by the holders of our Class A
common stock are referred to as "Class A Directors" and directors elected by the
holders of our Class B common stock are referred to as "Class B Directors."
Currently, our Class A stockholders are entitled to elect seven directors, with
6 directors nominated by the Class A nominating committee and one director
nominated by at least seven members of the board of directors, and our Class B
stockholders are entitled to elect six directors, which are nominated by the
Class B nominating committee. Subject to the terms of NBCi's certificate of
incorporation, all directors hold office until the next annual meeting of the
stockholders and until their successors have been duly elected and qualified.
Executive officers are appointed by and serve at the discretion of the board of
directors.
BOARD COMMITTEES
The board of directors has established an audit committee, a compensation
committee and an investment committee. The audit committee, consisting of James
Heffernan, Philip Schlein and Mark W. Begor, recommends the selection of
independent public accountants to the board of directors, reviews the scope and
results of the audit and other services provided by our independent accountants,
and reviews our accounting practices and systems of internal accounting
controls.
The compensation committee, consisting of James Heffernan and Mark W. Begor,
reviews and approves the salaries, bonuses and other compensation payable to our
executive officers and administers and makes recommendations concerning our
employee benefit plans.
The investment committee, consisting of Mark W. Begor, Robert C. Harris,
Jr., James Heffernan, Chris Kitze and Martin J. Yudkovitz, has authority to
approve strategic acquisitions of NBCi up to $50.0 million and material
investments of NBCi up to $10.0 million.
DIRECTOR COMPENSATION
Upon appointment to our board of directors, the Class A Directors receive
25,000 options, at an exercise price equal to the fair market value of our
Class A common stock on the date of grant. The options vest on a monthly basis
over a period of three years. To date, we have not determined the amount of cash
compensation, if any, that our directors will receive for serving on our board.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Except for James Heffernan, no member of our compensation committee serves
as a member of the board of directors or compensation committee of any entity
that has one or more executive officers serving as a member of our board of
directors or compensation committee. During the last fiscal year, Mr. Heffernan
also served as a member of the compensation committee of Xoom.com of which Mr.
Kitze, our chief executive officer and a Class A Director, served as chairman of
the board. Mr. Kitze did not receive any compensation from Xoom.com or NBCi
during the last fiscal year.
There are no family relationships among any of our directors or executive
officers.
EXECUTIVE COMPENSATION
The following table contains information in summary form concerning the
compensation paid to our chief executive officer and each of our most highly
compensated executive officers whose total salary, bonus and other compensation
exceeded $100,000 during the fiscal year ended December 31, 1999. In accordance
with the rules of the SEC, the compensation described in this table does not
include perquisites and other personal benefits received by the executive
officers named in the table below which do not exceed the lesser of $50,000 or
10% of the total salary and bonus reported for these officers.
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SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
1999 ANNUAL COMPENSATION --------------
SECURITIES
------------------------ UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#)
- ---------------------------------------------------------------------- ----------- ----------- --------------
<S> <C> <C> <C>
Chris Kitze
Chief Executive Officer........................................... -- -- --
Edmond P. Sanctis
President and Chief Operating Officer............................. 30,770 244,000 500,000
John McMenamin
Executive Vice President, Sales and Marketing..................... 13,462 175,000 300,000
Alan Braverman
President, Business to Business................................... 20,833 147,500 1,000,000
<CAPTION>
ALL OTHER
NAME AND PRINCIPAL POSITION COMPENSATION
- ---------------------------------------------------------------------- -------------------
<S> <C>
Chris Kitze
Chief Executive Officer........................................... --
Edmond P. Sanctis
President and Chief Operating Officer............................. --
John McMenamin
Executive Vice President, Sales and Marketing..................... --
Alan Braverman
President, Business to Business................................... --
</TABLE>
OPTION GRANTS DURING FISCAL 1999
The following table sets forth information concerning grants of stock
options to each of the executive officers named in the table above during the
fiscal year ended December 31, 1999. All options granted to these executive
officers in the last fiscal year were granted under our 1999 stock incentive
plan. The percentage of total options set forth below is based on an aggregate
of 2,746,286 options granted to employees during the fiscal year ended
December 31, 1999. All options were granted at the fair market value of our
Class A common stock on the date of grant. The exercise price may in some cases
be paid by delivery of other shares or by offset of the shares subject to
options. The deemed value for the date of grant has been adjusted solely for
financial accounting purposes. Potential realizable values are net of exercise
price, but before taxes associated with exercise. Amounts represent hypothetical
gains that could be achieved for the options if exercised at the end of the
option term. The assumed 5% and 10% rates of stock price appreciation are
provided in accordance with the rules of the SEC and do not represent our
estimate or projection of the future Class A common stock price.
OPTIONS GRANTED IN FISCAL YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
PERCENT OF POTENTIAL REALIZABLE VALUE
NUMBER OF TOTAL OPTIONS AT ASSUMED ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE APPRECIATION
UNDERLYING EMPLOYEES IN EXERCISE FOR OPTION TERM
OPTIONS FISCAL YEAR PRICE PER EXPIRATION ------------------------------
NAME GRANTED 1999 SHARE DATE 5% 10%
- -------------------------------- ----------- --------------- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Chris Kitze..................... -- -- -- -- -- --
Edmond P. Sanctis............... 500,000 18.2% $ 52.50 12/7/09 $ 53,195,196 $ 82,352,897
John McMenamin.................. 300,000 10.9% $ 76.63 12/3/09 $ 29,535,117 $ 47,029,738
Alan Braverman.................. 800,000 29.1% $ 55.88 11/15/09 $ 78,760,313 $ 125,412,635
200,000 7.3% $ 72.06 11/22/09 $ 19,690,078 $ 31,353,159
</TABLE>
AGGREGATE OPTION EXERCISES IN FISCAL YEAR ENDED DECEMBER 31, 1999 AND OPTION
VALUES AT DECEMBER 31, 1999
The following table sets forth information concerning exercisable and
unexercisable stock options held by each of the executive officers named in the
summary compensation table at December 31, 1999. The value of unexercised
in-the-money options is based on the fair market
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value of our Class A common stock on December 31, 1999 of $77.25 per share minus
the actual exercise price. All options were granted under our 1999 stock
incentive plan.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
VALUE OPTIONS AT FISCAL YEAR END FISCAL YEAR END
SHARES ACQUIRED REALIZED -------------------------- ---------------------------
NAME ON EXERCISE (#) ($) EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ----------------------- --------------- ------------- -------------------------- ---------------------------
<S> <C> <C> <C> <C>
Chris Kitze............ -- -- --/-- --/--
Edmond P. Sanctis...... 25,000 $ 1,686,050 110,441/670,841 $7,601,426/$22,385,040
John McMenamin......... -- -- --/300,000 --/$186,000
Alan Braverman......... -- -- --/1,000,000 --/$18,134,000
</TABLE>
EMPLOYMENT AGREEMENTS
On October 21, 1999, Edmond P. Sanctis, then the chief operating officer of
Snap, entered into a letter agreement under which he agreed to become our
employee and to serve as our president and chief operating officer upon the
closing of the transactions forming us. Upon entering into the letter agreement,
Mr. Sanctis received a bonus payment of $200,000. As our president and chief
operating officer, Mr. Sanctis will receive an annual salary of $400,000, and he
will be entitled to receive a quarterly bonus of up to $100,000 and an annual
bonus of up to $100,000 upon the achievement of certain performance goals. In
December 1999, Mr. Sanctis received an option to purchase 500,000 shares of our
Class A common stock at an exercise price of $52.50 per share. The options vest
monthly over a three-year period.
BENEFIT PLANS
1999 STOCK INCENTIVE PLAN
Our 1999 stock incentive plan was approved by our board of directors and our
stockholders in October of 1999 and by the stockholders of Xoom.com in
November 1999. Our 1999 stock incentive plan provides for the grant to our
employees, including officers and employee directors, of incentive stock options
within the meaning of Section 422 of the Internal Revenue Code and for the grant
of nonstatutory stock options, stock appreciation rights, restricted stock,
performance awards or units, dividend equivalent rights or similar forms of
compensation to our employees, directors and consultants. Our 1999 stock
incentive plan is currently administered by our compensation committee which
selects the optionees, determines the number of shares to be subject to each
option and determines the exercise price of each option.
Our 1999 stock incentive plan authorizes the issuance of an aggregate of up
to 13,500,000 shares of Class A common stock. On the first business day of each
calendar year beginning 2001, the maximum number of shares issuable under the
1999 stock incentive plan will be increased to that number that, when added to
the number of unissued shares under outstanding awards, equals 30% of the number
of outstanding shares of our common stock on a fully diluted basis as of
December 31 of the immediately preceding calendar year. The maximum number of
shares that may be granted to any individual under our 1999 stock incentive plan
in any year is 1,000,000. As of December 31, 1999, options to purchase an
aggregate of 8,514,299 shares of Class A common stock were outstanding under the
1999 stock incentive plan, and an aggregate of 4,366,454 shares of Class A
common stock remained available for future grants.
The exercise price of all incentive stock options granted under our 1999
stock incentive plan must be at least equal to the fair market value of the
Class A common stock on the date of grant. The exercise price of all
nonstatutory stock options granted under our 1999 stock incentive plan shall be
determined by the administrator, but in no event may be less than 85% of the
fair market value on the date of grant. With respect to any participant who owns
stock possessing more than
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10% of the voting power of all our classes of stock, the exercise price of any
incentive option granted must equal at least 110% of the fair market value on
the grant date and the maximum term of any these options must not exceed five
years. The term of all other options granted under our 1999 stock incentive plan
may not exceed ten years.
In the event of a change in control, as defined below, each currently
outstanding award under the 1999 stock incentive plan automatically will have
its vesting accelerated by 12 months on the effective date of the corporate
transaction. Upon consummation of the corporate transaction, all outstanding
awards will terminate unless such award is assumed or replaced with a comparable
award or cash incentive program by the successor corporation or its affiliates
or such award is purchased for cash. If within 12 months of a change in control,
a participant is subsequently terminated or leaves for good reason, each
outstanding award of the participant shall become fully vested and exercisable.
Under the 1999 stock incentive plan a "change in control" is defined as any
merger, consolidation or other form of business combination in which our
stockholders do not own at least 50% of the combined voting power in the
surviving entity, the acquisition of 50% of the total combined voting power of
our outstanding securities or a change in a majority of the board of directors
over a period of three years by reason of one or more contested elections. Any
increase in the securities ownership of NBC or its successors will not
constitute a change in control.
The stock incentive plan also provides for the accelerated vesting of
outstanding awards held by participants primarily in the service of one of our
affiliated entities, upon the sale, merger, consolidation or sale of
substantially all of the assets of such entity.
Our 1999 stock incentive plan will terminate in 2009. Our board of directors
has authority to amend or terminate our 1999 stock incentive plan, provided that
such action will not impair the rights of the holder of any outstanding awards
without the written consent of that holder.
1999 EMPLOYEE STOCK PURCHASE PLAN
Our board of directors adopted the 1999 employee stock purchase plan in
November 1999 and Xoom.com, at that time our sole stockholder, approved the plan
in November 1999. The 1999 employee stock purchase plan is intended to qualify
under Section 423 of the Internal Revenue Code. We have reserved 300,000 shares
of our Class A common stock for issuance under the plan.
On January 1 of each year, starting with the year 2001, the number of shares
in reserve will be increased by the lesser of (1) 100,000 shares, or (2) a
lesser number of shares as determined by the plan administrator. The plan is
administered by our compensation committee. All of our employees are eligible to
participate if they are employed by us for more than 20 hours per week and for
more than five months per year. Eligible employees may begin participating in
the 1999 employee stock purchase plan at the start of any offering period. Each
offering period lasts twenty-seven months. Offering periods start on January 1
and July 1 of each year. The 1999 employee stock purchase plan permits each
eligible employee to purchase Class A common stock through payroll deductions.
An employee's payroll deductions may not exceed 10% during any offer period.
Purchases of our Class A common stock will occur on June 30 and December 31
of each year or on the last trading day prior to those dates. Each participant
may purchase up to 200 shares on any purchase date; provided no more than 200
shares may be purchased during any offer period. The price of each share of
Class A common stock purchased under the 1999 employee stock purchase plan will
be 85% of the lower of, (1) the fair market value per share of Class A common
stock on the trading day immediately before the first day of the applicable
offering period or (2) the fair market value per share of Class A common stock
on the purchase date. Employees may end their participation in the 1999 employee
stock purchase plan at any time. Participation ends automatically upon
termination of employment with us. If a change in control occurs, the plan
administrator will either shorten the current offer period or provide for the
assumption of the
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purchase rights by the successor. Unless the participant elects to withdraw from
the revised offer period, shares will be purchased with the payroll deductions
accumulated to date by participating employees. Our board of directors may amend
or terminate the 1999 employee stock purchase plan at any time. If our board
increases the number of shares of Class A common stock reserved for issuance
under the plan, except for the automatic increases described above, it must seek
the approval of our stockholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
Our certificate of incorporation and bylaws provide that we will indemnify
all of our directors and officers to the fullest extent permitted by Delaware
law. Our certificate of incorporation and bylaws also authorize us to indemnify
our employees and other agents, at our option, to the fullest extent permitted
by Delaware law. We intend to enter into agreements to indemnify our directors
and officers, in addition to indemnification provided for in our charter
documents. These agreements, among other things, will provide for the
indemnification of our directors and officers for certain expenses (including
attorneys' fees), judgments, fines and settlement amounts incurred by any such
person in any action or proceeding, including any action by or in the right of
NBC Internet, arising out of such person's services as one of our directors or
officers or any other company or enterprise to which such person provides
services at our request to the fullest extent permitted by applicable law. We
believe that these provisions and agreements will assist us in attracting and
retaining qualified persons to serve as directors and officers.
Delaware law permits a corporation to provide in its certificate of
incorporation that a director of the corporation shall not be personally liable
to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability for any breach of the
director's duty of loyalty to the corporation or its stockholders, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, under Section 174 of the General Corporation Law of the State
of Delaware, or for any transaction from which the director derived an improper
personal benefit. Our certificate of incorporation provides for the elimination
of personal liability of a director for breach of fiduciary duty, as permitted
by Delaware law.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
the provisions contained in our charter documents, Delaware law or otherwise, we
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. If a claim for indemnification against such
liabilities (other than the payment by us of expenses incurred or paid by one of
our directors, officers or controlling persons in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by us is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of this issue.
We have purchased and maintain insurance on behalf of our officers and
directors insuring them against liabilities that they may incur in such
capacities or arising out of such status.
There is no pending litigation or proceeding involving one of our directors
or officers as to which indemnification is being sought, nor are we aware of any
pending or threatened litigation that may result in claims for indemnification
by any director or officer.
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RELATED PARTY TRANSACTIONS
Xoom.com entered into a consulting agreement, dated May 15, 1998, with James
J. Heffernan, one of our and Xoom.com's outside directors, which agreement
terminated on November 15, 1999. The agreement provides for Mr. Heffernan to
receive options to buy 16,667 shares of common stock of Xoom.com at an exercise
price of $3.33 per share and monthly compensation of $10,000, paid in the form
of common stock. Mr. Heffernan was granted stock options to buy an additional
16,667 shares of common stock of Xoom.com at an exercise price of $3.33 per
share upon completion of Xoom.com's initial public offering. In addition,
Mr. Heffernan was entitled to a finder's fee, payable in shares of common stock
of Xoom.com, of 5% of any investment he secured on Xoom.com's behalf between
May 15, 1998 and June 30, 1998. Under this arrangement, Mr. Heffernan received
50,203 shares of common stock of Xoom.com.
On July 28, 1998, Jeffrey Ballowe, one of our and Xoom.com's outside
directors, entered into a letter agreement with Xoom.com, which was amended as
of December 2, 1998. Under this letter agreement, as amended, Mr. Ballowe agreed
to serve as a member of the board of directors of Xoom.com. The letter agreement
provides for compensation in the form of options to buy 23,334 shares of common
stock of Xoom.com at an exercise price of $6.75 per share, which will vest
monthly over a two year period or immediately upon a sale of Xoom.com.
Mr. Ballowe also receives a monthly fee of $10,000 as compensation for his
service as a director of Xoom.com. This fee is payable in shares of common stock
based upon the stock's closing price on the last trading day of the month.
Mr. Ballowe also receives compensation equal to 5% of all funds he raises for
Xoom.com, payable in common stock. Mr. Ballowe's agreement has a term of
18 months.
On July 28, 1998, Philip Schlein, one of our and Xoom.com's outside
directors, entered into a letter agreement with Xoom.com, which was amended as
of December 2, 1998. Under this letter agreement, as amended, Mr. Schlein agreed
to serve as a member of the board of directors of Xoom.com. The letter agreement
provides for compensation in the form of options to buy 23,333 shares of common
stock of Xoom.com at an exercise price of $6.75 per share, which will vest
monthly over a two year period or immediately upon a sale of Xoom.com.
Mr. Schlein also receives a monthly fee of $10,000 payable in cash or in common
stock of Xoom.com, at Mr. Schlein's option, as compensation for his service as a
director of Xoom.com. Mr. Schlein's agreement has a term of 18 months.
On July 28, 1998, Robert C. Harris, Jr., one of our and Xoom.com's outside
directors, entered into a letter agreement with Xoom.com, which was amended as
of December 2, 1998. Under this letter agreement, as amended, Mr. Harris agreed
to serve as a member of the board of directors of Xoom.com. The letter agreement
provides for compensation in the form of options to buy 23,334 shares of common
stock of Xoom.com at an exercise price of $6.75 per share, which will vest
monthly over a two year period or immediately upon a sale of Xoom.com.
Mr. Harris also receives a monthly fee of $10,000 payable in cash or in common
stock of Xoom.com, at Mr. Harris' option, as compensation for his service as a
director of Xoom.com. Mr. Harris' agreement has a term of 18 months.
On August 4, 1998, John Harbottle, Xoom.com's chief financial officer,
entered into an employment agreement with Xoom.com. The employment agreement
provides for an annual salary of $144,000. Mr. Harbottle is also eligible for a
discretionary quarterly bonus of up to $10,000. Should Xoom.com terminate
Mr. Harbottle without cause, as defined in the agreement, Xoom.com must provide
Mr. Harbottle 180 days' advance written notice. Xoom.com may, in its discretion,
terminate Mr. Harbottle's employment at any time prior to the end of this notice
period, provided Xoom.com pays Mr. Harbottle an amount equal to his base
compensation plus any benefits Mr. Harbottle would have earned through the
balance of the notice period. If Xoom.com exercises
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its right to terminate Mr. Harbottle without cause, Mr. Harbottle shall be
immediately entitled to exercise 100% of any stock options Xoom.com has granted
to him that had not previously vested. Mr. Harbottle may exercise his vested
stock options for a four month period from the date Xoom.com notifies him of its
intention to terminate his employment.
Should Xoom.com terminate Mr. Harbottle for cause, Xoom.com must pay
Mr. Harbottle all compensation due on the date of termination. In the event of a
change in control or corporate transaction, as defined in the agreement, as a
result of which Mr. Harbottle's employment with Xoom.com is involuntarily
terminated, with or without cause, Mr. Harbottle will be entitled to payment of
an amount equal to 6 months' base compensation plus benefits, and all stock
options Xoom.com previously granted to Mr. Harbottle will immediately become
fully vested and exercisable.
Under the terms of his agreement, Mr. Harbottle may terminate his employment
with Xoom.com at any time for any reason by providing Xoom.com with thirty days'
advance written notice. Should Mr. Harbottle's employment with Xoom.com
terminate for any reason, the agreement further provides that Mr. Harbottle:
(A) will not use any of Xoom.com's proprietary information without Xoom.com's
prior written consent; (B) will not use any confidential information to compete
against Xoom.com or any of Xoom.com's employees; and (C) will not, for one year
following termination, solicit any of Xoom.com's customers or employees.
In May 1999, Xoom.com granted Mr. Harbottle options to purchase up to 31,792
shares of common stock at a per share exercise price of $45.50. In
September 1999, Xoom.com granted Mr. Harbottle options to purchase up to 90,000
shares of common stock at a per share exercise price of $35.9375 per share.
Mr. Kitze and Flying Disc, of which Mr. Kitze serves as general partner,
entered into a voting agreement dated May 9, 1999 with NBC and CNET. Under the
terms of the voting agreement, Mr. Kitze and Flying Disc agreed to vote all
3,350,680 shares of Xoom.com common stock they beneficially own in favor of the
transactions that formed us.
In August 1999, Mr. Ballowe, Mr. Schlein, Mr. Harris and Mr. Heffernan each
received options to purchase up to 25,000 shares of common stock of Xoom.com at
a per share exercise price of $30.19. The options vest at a rate of
one-thirty-sixth per month over 36 months.
On September 13, 1999, Xoom.com and Snap entered into a strategic alliance
with ValueVision, a company in which an affiliate of NBC owns a 38.1% ownership
interest. The terms of the strategic alliance were negotiated at arms length.
See "Business--Strategic Alliances" for a more detailed description of this
relationship.
On October 18, 1999, as consideration for agreeing to serve on Xoom.com's
board of directors, L. Lowry Mays was granted an option to purchase 25,000
shares of common stock of Xoom.com at an exercise price of $54.875 per share.
The options vest monthly over a three year period. In June 1999, Xoom.com
entered into an agreement with Clear Channel Broadcasting, Inc., a subsidiary of
Clear Channel Communications. Mr. Mays is the chief executive officer, chairman
of the board and a director of Clear Channel Communications. The terms of the
agreement with Clear Channel Broadcasting are described under
"Business--Strategic Alliances" and Mr. Mays was not affiliated with Xoom.com at
the time the agreement was entered into.
In August 1999, Mr. Sanctis received options to purchase an aggregate amount
of 100,000 units of Snap at an exercise price of $30.19 per unit. The options
vest at a rate of one thirty-sixth per month over 36 months.
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In November 1999, Michael M. Lynton, one of our outside directors, received
options to purchase up to 25,000 shares of our Class A common stock at a per
share exercise price of $63.19. The options vest at a rate of one thirty-sixth
per month over 36 months.
In March 1999, Shawn Hardin, NBCi's Executive Vice President, Product and
Executive Producer, received options to purchase up to 34,512 units of Snap at
an exercise price of $24.31 per unit. The options vest at a rate of one
thirty-sixth per month over 36 months. In August 1999, Mr. Hardin and
Kenneth S. Norton, NBCi's Chief Technology Officer, each received options to
purchase up to 75,000 units of Snap at an exercise price of $30.19 per unit. The
options vest at a rate of one thirty-sixth per month over 36 months. In
December 1999, Mr. Hardin and Mr. Norton each received options to purchase up to
30,000 shares of our Class A common stock at a per share exercise price of
$60.44. The options vest at a rate of one thirty-sixth per month over
36 months.
On November 17, 1999, John McMenamin, NBCi's Executive Vice President, Sales
and Marketing, entered into an employment agreement with NBCi. The employment
agreement provides for an annual salary of $350,000. Mr. McMenamin is also
eligible for up to $350,000 in commissions if NBCi achieves certain target sales
goals. Mr. McMenamin was eligible to receive a signing bonus of $175,000 on his
thirtieth day of employment. Should we terminate Mr. McMenamin without cause in
the first 12 months of his employment, Mr. McMenamin will receive 25,000 shares
of our Class A common stock. Mr. McMenamin was also granted options to purchase
up to 300,000 shares of Class A common stock at a per share exercise price of
$76.63. The options vest at a rate of 25% after 12 months and one forty-eighth
of the total grant per month over the next 36 months.
On November 12, 1999, Alan Braverman, NBCi's President, Business to
Business, entered into an employment agreement with NBCi. The employment
agreement provides for an annual salary of $250,000. Mr. Braverman was also
granted an option to purchase up to 800,000 shares of our Class A common stock
at a per share exercise price of $55.88. The options vest at a rate of 25% after
12 months, and one forty-eighth of the total grant per month over the next
36 months. On November 22, 1999, we granted Mr. Braverman options to purchase up
to 200,000 shares of our Class A common stock at a per share exercise price of
$72.06. The options vest on a monthly basis over 36 months. In addition,
effective November 15, 1999 Mr. Braverman received a grant of 2,500 shares of
our Class A common stock.
We intend to enter into indemnification agreements with each of our
directors and officers. These indemnification agreements will require us to
indemnify these individuals to the fullest extent permitted by Delaware law.
We also have entered into various employment agreements with some of our
officers. See "Management--Employment Agreements" for a more detailed
description.
We believe that all of the transactions set forth above were made on terms
no less favorable to us than could have been obtained from unaffiliated third
parties. We intend that all future transactions, including loans, between us and
our officers, directors, principal stockholders and their affiliates will be
approved by a majority of the board of directors, including a majority of the
independent and disinterested outside directors on the board of directors, and
will be on terms no less favorable to us than could be obtained from
unaffiliated third parties.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the beneficial ownership of our Class A
common stock and Class B common stock as of December 31, 1999 and as adjusted to
reflect the sale of the shares of Class A common stock in this offering by:
- each person or entity known by us to own beneficially more than five
percent of our Class A common stock;
- our chief executive officer, each of the executive officers named in the
summary compensation table and each of our directors;
- all of our executive officers and directors as a group; and
- the selling stockholders.
The beneficial ownership is calculated based on 52,226,253 shares of our
Class A common stock and Class B common stock outstanding as of December 31,
1999 and 55,876,253 shares outstanding immediately following the completion of
this offering. Beneficial ownership is determined in accordance with the rules
of the SEC and generally includes voting or investment power with respect to
securities. Unless otherwise indicated, each person or entity named in the table
has sole voting power and investment power, or shares voting and investment
power with his or her spouse, with respect to all shares of capital stock listed
as owned by such person. Shares issuable upon the exercise of options that are
currently exercisable or become exercisable within sixty days of December 31,
1999 are considered outstanding for the purpose of calculating the percentage of
outstanding shares of our common stock held by the individual, but not for the
purpose of calculating the percentage of outstanding shares of our common stock
held by an other individual.
The address of each of the executive officers and directors is c/o NBC
Internet, 255 Bush Street, San Francisco, California 94104.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED AFTER THIS
NUMBER OF SHARES NUMBER OF OFFERING
BENEFICIALLY SHARES BEING --------------------------------
HELD PERCENTAGE OFFERED NUMBER PERCENTAGE
------------------ --------------- ------------- ------------------- -----------
<S> <C> <C> <C> <C> <C>
NBC(1)....................... 24,550,708 47.0% -- 24,550,708 43.9%
CNET Investments II,
Inc.(2).................... 7,147,584 13.7 650,000 6,497,584 11.6
Chris Kitze(3)............... 3,350,680 6.4 300,000 3,050,680 5.5
Edmond Sanctis(4)............ 152,219 * -- 152,219 *
John McMenamin............... -- -- -- -- --
Alan Braverman............... 2,500 * -- 2,500 *
James J. Heffernan(5)........ 138,667 * -- 138,667 *
Jeffrey Ballowe(6)........... 34,702 * -- 34,702 *
Robert C. Harris, Jr.(7)..... 33,156 * -- 33,156 *
Philip Schlein(8)............ 20,969 * -- 20,969 *
L. Lowry Mays(9)............. 2,778 * -- 2,778 *
Michael Lynton(10)........... 2,083 * -- 2,083 *
Mark W. Begor................ -- -- -- -- --
Gary M. Reiner............... -- -- -- -- --
Scott M. Sassa............... -- -- -- -- --
John F. Welch, Jr............ -- -- -- -- --
Robert C. Wright............. 30,000 * * 30,000 *
Martin J. Yudkovitz.......... -- -- -- -- --
All executive officers and
directors as a group
(19 persons)(11)........... 4,016,112 7.6% 300,000 3,716,112 6.6%
</TABLE>
- --------------------------
* Less than 1%.
(1) Represents ownership of Class B common stock. The address of NBC is 30
Rockefeller Plaza, New York, New York 10012.
(2) The address of CNET Investments II, Inc. is 150 Chestnut Street, San
Francisco, California 94111.
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(3) Includes 3,350,680 shares of Xoom.com common stock held by Flying Disc
Investments Limited Partnership, of which Mr. Kitze is a general partner.
Mr. Kitze may be deemed to be the beneficial owner of the shares held by
Flying Disc.
(4) Includes options to purchase 152,219 shares of our Class A common stock.
(5) Includes options to purchase 9,636 shares of NBCi Class A common stock. Also
includes 129,030 shares of Class A common stock held by the Heffernan Family
Trust. Mr. Heffernan may be deemed to be the beneficial owner of the shares
and warrants to purchase shares of common stock held by the Heffernan LLC
and the Heffernan Family Trust. Also includes 4,000 shares of Class A common
stock held by Sandra Heffernan, who is Mr. Heffernan's wife.
(6) Includes options to purchase 1,389 shares of our Class A common stock.
(7) Includes options to purchase 4,167 shares of our Class A common stock.
(8) Includes options to purchase 4,167 shares of our Class A common stock.
(9) Includes options to purchase 2,778 shares of our Class A common stock.
(10) Includes options to purchase 2,083 shares of our Class A common stock.
(11) Includes options to purchase 360,407 shares of our Class A common stock.
TRACES STOCKHOLDER
Pursuant to a forward purchase contract between the TRACES Trust and the
stockholder listed below, a specified number of shares of Class A common stock
may be required to be delivered to the TRACES Trust by the TRACES stockholder
upon the exchange of Automatic Common Exchange Securities. The following table
sets forth certain information by the TRACES stockholder with respect to:
- the TRACES stockholder's beneficial ownership of Class A common stock
after the offering and the percentage of common stock represented thereby;
- the maximum number of Class A common stock owned by the TRACES stockholder
that may be delivered to the TRACES Trust pursuant to the forward purchase
contract; and
- the TRACES stockholder's beneficial ownership of common stock after
delivery of the maximum number of shares of Class A common stock
represented thereby.
The TRACES stockholder's beneficial ownership of Class A common stock will
not change as a result of the offering of the Automatic Common Exchange
Securities unless, until and to the extent that the TRACES stockholder delivers
shares of Class A common stock to the TRACES Trust pursuant to the forward
purchase contract.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
AFTER DELIVERY OF
-----------------------------
MAXIMUM NUMBER
OF SHARES DELIVERABLE
MAXIMUM NUMBER TO TRACES TRUST(1)(2)
AFTER THE OF SHARES DELIVERABLE -----------------------------
TRACES STOCKHOLDER OFFERING PERCENTAGE TO TRACES TRUST(1)(2) NUMBER PERCENTAGE
- ---------------------------------- ----------------- ----------- ---------------------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
CNET Investments II, Inc.......... 6,497,584 11.6% 1,437,500 5,060,084 9.1%
</TABLE>
- ------------------------
(1) The 1,250,000 shares of Class A common stock deliverable to the TRACES Trust
will be delivered by CNET Investments II Inc. CNET may be required to
deliver up to an additional 187,500 shares of Class A common stock if the
underwriters' over-allotment option is exercised in respect of the Automatic
Common Exchange Securities.
(2) Pursuant to the forward purchase contract, the shares deliverable thereunder
will be delivered to the TRACES Trust on the exchange date under the forward
purchase contract. The exchange date will occur no earlier than
February 15, 2003. Under the forward purchase contracts, some of the shares
of Class A common stock covered by the forward purchase contracts are not
mandatorily delivered to the TRACES Trust.
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DESCRIPTION OF CAPITAL STOCK
DESCRIPTION OF OUR CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of Class A
common stock, $0.0001 par value per share, 100,000,000 shares of Class B common
stock, $0.0001 par value per share and 10,000,000 shares of preferred stock,
$0.0001 par value per share.
OUR COMMON STOCK
As of December 31, 1999, 27,675,545 shares of our Class A common stock and
24,550,708 shares of Class B common stock were outstanding.
The holders of Class A common stock and Class B common stock have identical
economic rights except that the Class B common stock will not be publicly
traded. Except for those matters discussed below under "Governance Rights Set
Forth in Our Certificate of Incorporation and Bylaws," the holders of Class A
common stock and Class B common stock have the same governance rights and are
entitled to one vote for each share held of record on all matters submitted to a
vote of the stockholders. In addition, only NBC and its affiliates may own the
Class B common stock. Our stockholders do not have cumulative voting rights in
the election of directors. Subject to preferences that may be granted to any
then outstanding preferred stock, holders of common stock are entitled to
receive ratably such dividends as may be declared by the board of directors out
of funds legally available therefor as well as any distributions to the
stockholders. In the event of our liquidation, dissolution or winding up,
holders of common stock are entitled to share ratably in all of our assets
remaining after payment of liabilities and the liquidation preference of any
then outstanding preferred stock. Holders of common stock have no preemptive or
other subscription or conversion rights under our certificate of incorporation.
NBC, however, does have the right to purchase additional shares of our Class B
common stock under specific circumstances as described below under "Governance
Rights Set Forth in Our Certificate of Incorporation and Bylaws--Other
Agreements". There are no redemption or sinking fund provisions applicable to
the common stock.
PREFERRED STOCK
We have 10,000,000 shares of preferred stock authorized. As of the record
date, no shares were outstanding. Subject to the terms of its certificate of
incorporation, our board of directors has the authority to issue these shares of
preferred stock in one or more series and to fix the rights, preferences,
privileges and restrictions, qualifications and limitations granted to or
imposed upon any unissued and undesignated shares of preferred stock and to fix
the number of shares constituting any series and the designations of such
series, without any further vote or action by the stockholders. Our board of
directors, without stockholder approval, except as set forth below under
"Governance Rights Set Forth in Our Certificate of Incorporation and
Bylaws--Stockholder Veto Rights," can issue preferred stock with voting and
conversion rights which could adversely affect the voting power or other rights
of the holders of our common stock and the issuance of preferred stock may have
the effect of delaying, deferring or preventing a change in control of NBCi.
WARRANT
As part of the ValueVision transaction, ValueVision agreed to purchase a
warrant for 244,004 shares of Xoom.com common stock at an exercise price of
$40.893 per share. The warrant may be exercised at any time after November 30,
1999 through September 12, 2004. We assumed this warrant on November 30, 1999
under the same terms and conditions as originally entered into by Xoom.com.
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CONVERTIBLE NOTES
In connection with the transactions which formed us, we issued two
subordinated zero coupon convertible notes due 2006. The convertible note issued
to NBC Multimedia, an affiliate of NBC, has a principal at maturity of
$39,477,953 and is convertible by NBC Multimedia into 471,031 shares of our
Class B common stock at any time after the November 30, 2000. The other
convertible note purchased by GE Investments Subsidiary has a principal at
maturity of $447,416,805 and is convertible into 5,338,357 shares of our
Class B common stock at any time after November 30, 2000. The imputed original
issue discount interest rate on both convertible notes is 4%.
Each of the notes matures on November 30, 2006 and contains customary
anti-dilution provisions. In the event of a change of control, merger or similar
transactions, each note is redeemable at the purchaser's option at a price equal
to the aggregate principal amount or equivalent value in shares. We may redeem
each of the notes with cash, stock or both after the November 30, 2004 on at
least 30 days notice and at a redemption price equal to the principal at
maturity of such note less any original issue discount not accrued on the
redemption date.
Each of the notes provides that payments of principal and interest shall be
subordinated in right of payment to the prior payment in full of all of our
other indebtedness. Such subordination, however, does not limit the payment of
principal of and interest on the notes in accordance with their terms unless, at
the time of such payment, there is a default in the payment of principal of or
interest on our other indebtedness.
GOVERNANCE RIGHTS SET FORTH IN OUR CERTIFICATE OF INCORPORATION AND BYLAWS
The following contains a summary of the governance rights of the holders of
our Class A common stock and Class B common stock contained in our certificate
of incorporation and bylaws.
NUMBER OF DIRECTORS. As long as shares of Class B common stock remain
outstanding, the number of members of our board of directors shall be thirteen.
The number of directors may be increased upon the occurrence of the
circumstances discussed below, but shall return to thirteen at the next annual
or special meeting where directors are elected. The certificate of incorporation
currently provides that when no shares of Class B common stock remain
outstanding, the number of directors shall not be less than seven nor more than
sixteen.
ELECTION OF DIRECTORS. Under the certificate of incorporation, the holders
of the Class A common stock and the holders of Class B common stock are entitled
to elect a designated number of directors dependent upon the percentage of our
outstanding common stock each class owns.
For so long as the outstanding shares of Class B common stock represent at
least 35% of the outstanding shares of our common stock and the NBCi convertible
notes have not been fully converted into shares of Class B common stock:
- the holders of the Class A common stock, voting separately as a class,
have the right to elect six members to the board of directors, referred to
as Class A Directors, and one unaffiliated director nominated by at least
seven members of the board of directors; and
- the holders of the Class B common stock, voting separately as a class,
have the right to elect six members to the board of directors, referred to
as the Class B Directors.
The above rights shall also exist where the holders of a majority of the
outstanding shares of Class B Common Stock, voting separately as a class, elect
to reduce the number of directors they are otherwise entitled to elect from
seven to six, as set forth in the next paragraph, which election shall be
permanent.
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After our convertible notes have been fully converted into shares of
Class B common stock, for so long as the outstanding shares of Class B common
stock represent at least 35% of outstanding shares of our common stock:
- the holders of the Class A common stock, voting separately as a class,
have the right to elect six Class A Directors;
- the holders of the Class B common stock, voting separately as a class,
have the right to elect seven Class B Directors; and
- the term of office of the unaffiliated director shall automatically
terminate, unless the Class B nominating committee elects to retain the
unaffiliated director as a Class B Director.
Where the outstanding shares of Class B common stock is equal to or greater
than 20% but less than 35% of the outstanding shares of our common stock:
- the holders of the Class A common stock, voting separately as a class,
have the right to elect seven Class A Directors;
- the holders of the Class B common stock, voting separately as a class,
have the right to elect six Class B Directors; and
- the term of office of the unaffiliated director shall automatically
terminate, unless the Class A nominating committee elects to retain the
unaffiliated director as a Class A Director.
If, at such time, there are seven Class B Directors, the holders of the
Class B common stock shall cause one Class B Director to resign within 30 days
after the Class B common stock constitutes less than 35% of the outstanding
common stock. If a Class B Director does not resign by such time, the number of
directors comprising the board of directors will automatically be increased to
fifteen and two additional Class A Directors will be appointed to the board of
directors. The number of directors shall automatically decrease to thirteen at
the next annual or special meeting of stockholders at which directors are
elected, at which time the board of directors shall be comprised of six Class B
Directors and seven Class A Directors.
Concurrently with the conversion of all of the outstanding shares of
Class B common stock into shares of Class A common stock, as discussed below,
the former holders of the Class B common stock shall cease to have the absolute
right to designate or cause the nomination or election of any of our directors.
Each Class B Director shall be automatically deemed a Class A Director and shall
continue to hold office for the unexpired portion of such director's term. NBC,
however, will have the right to designate nominees for election to the board of
directors pursuant to the terms of the governance agreement discussed below.
NOMINATIONS AND VACANCIES
CLASS A DIRECTORS. Class A Directors are nominated on our behalf by the
Class A nominating committee comprised solely of Class A Directors. At such time
as the holders of the Class A common stock are entitled to elect additional
Class A Director(s) to the board of directors, the Class A nominating committee
may appoint such Class A Director(s). If a vacancy is created on the board of
directors by reason of the death, resignation or removal of a Class A Director,
a majority of the Class A Directors then in office, or the holders of Class A
common stock at a meeting called for such purpose, may fill the vacancy.
CLASS B DIRECTORS. Class B Directors are nominated on our behalf by the
Class B nominating committee comprised solely of Class B Directors. At such time
as the holders of the Class B common stock are entitled to elect an additional
Class B Director to the board of directors, the Class B nominating committee may
appoint such Class B Director. If a vacancy is created on the
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board of directors by reason of the death, resignation or removal of a Class B
Director, a majority of the Class B Directors then in office, or the holders of
Class B common stock at a meeting called for such purpose, may fill the vacancy.
UNAFFILIATED DIRECTOR. For the unaffiliated director to be nominated for
election by the holders of the Class A common stock, at least seven members of
our board of directors must approve the nomination. The unaffiliated director's
term automatically expires at such time as either the holders of the Class A
common stock or the holders of the Class B common stock have the right to elect
a majority of the members to the board of directors, provided that the Class A
nominating committee or the Class B nominating committee, as the case may be,
may elect to retain the unaffiliated director in lieu of appointing a new person
to the board of directors.
REMOVAL OF DIRECTORS. A Class A Director may be removed, without cause,
only by the affirmative vote of the holders of a majority of the outstanding
shares of Class A common stock. A Class B Director may be removed, without
cause, only by the affirmative vote of the holders of a majority of the
outstanding shares of Class B common stock.
The unaffiliated director may be removed, without cause, only by the
affirmative vote of the holders of at least 70% of the outstanding shares of our
common stock.
APPOINTMENT AND REMOVAL OF OFFICERS. So long as there are Class B
Directors, the Class B Directors shall have the exclusive power and authority to
appoint our chief financial officer and general counsel and remove our chief
executive officer.
CONVERSION OF CLASS B COMMON STOCK INTO CLASS A COMMON STOCK
VOLUNTARY CONVERSION. Upon the affirmative vote or written request of the
holders of a majority of the outstanding shares of Class B common stock for the
conversion of the Class B common stock into Class A common stock, all, but not
less than all, of the outstanding shares of Class B common stock shall
automatically convert on a share for share basis into the same number of shares
of Class A common stock. We will also permit the parent corporation of NBC and
its affiliates, to convert shares of Class A common stock held by such person
into shares of Class B common stock upon written request and subject to the
terms and conditions of the governance agreement.
MANDATORY CONVERSION. Shares of Class B common stock will automatically be
converted into shares of Class A common stock upon the occurrence of the
following events:
- any sale, assignment or transfer of shares of Class B common stock by NBC
or any of its affiliates, other than a transfer to an affiliate of such
holder; or
- at such time as the holders of Class B common stock beneficially own less
than 20% of the outstanding shares of our common stock immediately prior
to the time of conversion, after giving effect to NBC's right to purchase
additional shares of Class B common stock under the governance agreement.
AUTOMATIC CONVERSION OF CLASS A COMMON STOCK.
So long as shares of Class B common stock are outstanding, in the event a
holder of Class B common stock or its subsidiary holds, purchases or otherwise
acquires any shares of Class A common stock (other than as a result of a
conversions described above), then such shares of Class A common stock shall
automatically convert on a share for share basis into the same number of shares
of Class B common stock.
ACTION BY WRITTEN CONSENTS. Action may be taken by written consent in lieu
of a stockholders meeting only when the Class B common stock constitutes a
majority of the outstanding shares of our common stock.
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VETO RIGHTS OF DIRECTORS
VETO RIGHTS OF CLASS A DIRECTORS. As long as the holders of Class B common
stock have the right to elect seven directors, the following actions require the
approval of a majority of the Class A Directors:
- any amendment to the certificate of incorporation or bylaws;
- entering into, altering or amending any agreement or engaging in any
transactions or series of transactions with NBC or its affiliates that
(A) is not on an arm's-length basis or entered into in the ordinary course
of business or (B) involves an amount, individually or in the aggregate,
in excess of $50,000,000;
- the voluntary filing of a petition for bankruptcy or receivership or the
failure to oppose a petition for bankruptcy or an action to appoint a
receiver;
- the appointment of a new chief executive officer;
- the adoption of our annual or other operating budgets and strategic plans;
- the adoption of a stockholder rights plan or other action which could
adversely affect the rights of any holder of Class A common stock by
virtue of the amount of shares held by such holder; and
- the issuance of any equity securities other than Class A common stock or
Class B common stock.
VETO RIGHTS OF CLASS B DIRECTORS. For so long as the Class B Directors do
not constitute a majority of the board of directors, the approval of a majority
of the Class B Directors will be required to take any of the following actions
and the veto rights of the Class A Directors described above shall no longer be
of any force or effect:
- any of the actions listed above under "--Veto Rights of Class A Directors"
over which the Class A Directors may exercise veto rights, other than with
respect to the appointment of a new chief executive officer, or any
transaction with NBC, or the adoption of a stockholders rights plan or
other action which could adversely affect the rights of the holders of the
Class A common stock;
- any action or transactions which would result in a change in control of us
or a change in control of any of our subsidiaries whose total assets or
gross revenues are in excess of $50,000,000;
- the sale or other disposition of our assets or any of our subsidiaries in
an amount in excess of $50,000,000 in any one transaction or series of
related transactions;
- the sale or issuance of our equity securities or any of our subsidiaries
(including any issuance pursuant to any merger or consolidation) for cash
or other consideration in an amount that exceeds $50,000,000 in any one
transactions or series of related transactions;
- engaging in any merger, consolidation or other business combination
transactions involving us in which we are not the surviving entity; and
- engaging in any transaction or series of related transactions that
requires the payment in cash by us or any of our subsidiaries or the
incurrence of indebtedness by us or any of our subsidiaries in an amount
that exceeds $50,000,000.
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STOCKHOLDER VETO RIGHTS. Subject to the rights of any then outstanding
preferred stock, the following actions require the approval of a majority of the
outstanding shares of Class A common stock and Class B common stock voting
separately as a class:
- any amendment to the certificate of incorporation or bylaws other than an
amendment consisting solely of an increase in our authorized capital
stock; and
- the issuance of Class B common stock to any person except to NBC or its
affiliates.
In addition, the approval of the holders of a majority of the outstanding
shares of Class B common stock will be required to adopt a stockholder rights
plan or take any other action that could adversely affect in any material
respect the rights of any holder of Class B common stock by virtue of the amount
of shares held by such holder.
CORPORATE OPPORTUNITIES. In recognition that we and NBC may engage in the
same or similar activities or lines of business and have an interest in the same
or similar areas of corporate opportunities, the certificate of incorporation
provides:
- that NBC has the right to engage in the same or similar activities or
lines of business as us, do business with any of our potential or actual
customers or suppliers or employ or otherwise engage any of our officers
or employees;
- that to the fullest extent provided by law, neither NBC nor any of its
officers or directors shall be liable to us or our stockholders for breach
of any fiduciary duty due to NBC or any of its officers or directors
engaging in the above opportunities; and
- that NBC shall not be liable for the breach of any fiduciary duty as our
stockholder if (a) NBC pursues or acquires a corporate opportunity for
itself, or (b) directs such corporate opportunity to another person, or
(c) fails to communicates such opportunity to us.
In the event that one of our directors or officers is also a director or
officer of NBC and such director or officer acquires knowledge of a corporate
opportunity, such director or officer:
- shall be deemed to have fully satisfied the fiduciary duty such person
owes to us and our stockholders with respect to that corporate
opportunity;
- shall not be deemed liable to us or our stockholders for pursuing such
corporate opportunity on behalf of NBC;
- shall be deemed to have acted in good faith; and
- shall not be deemed to have breached the duty of loyalty to us or our
stockholders, if such person acts in a manner consistent with the
following policy:
- a corporate opportunity offered to any person who is one of our
officers, and who is also a director but not an officer of NBC, shall
belong to us;
- a corporate opportunity offered to any person who is one of our
directors but not one of our officers, and who is also a director or
officer of NBC, shall belong to us if such opportunity is expressly
offered to such person in writing solely in his or her capacity as one
of our directors, otherwise it shall belong to NBC; and
- a corporate opportunity offered to any person who is an officer of both
us and NBC shall belong to us if such opportunity is expressly offered
to such person in writing solely in his or her capacity as one of our
officers, otherwise it shall belong to NBC.
The certificate of incorporation also provides that any corporate
opportunity that belongs to NBC or to us shall not be pursued by the other
party. If the corporate opportunity is not pursued diligently and in good faith
within 30 calendar days, the other party may pursue such corporate
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opportunity. In addition, the approval of a majority of the Class A Directors is
required to commence any action, suit or proceeding against NBC or its
affiliates or enter into any transaction or arrangement with NBC or its
affiliates, where such arrangement would otherwise require the action of the
full board of directors.
Any amendment of the corporate opportunity provisions set forth in the
certificate of incorporation in a manner adverse to NBC requires the approval of
stockholders holding at least 80% of the outstanding shares of our common stock.
The provisions contained in our certificate of incorporation regarding
corporate opportunities as described above shall expire on the date that
(a) NBC ceases to beneficially own at least 20% of the voting power of the
outstanding shares of our common stock, and (b) no person who is one of our
directors or officers is also a director or officer of NBC.
OTHER AGREEMENTS. The governance and investor rights agreement between us
and NBC provide for, among other things, that when no shares of Class B common
stock remain outstanding and NBC or its affiliates beneficially own at least 5%
of our outstanding shares common stock, NBC shall have the right to designate
nominees for election to the board of directors equal to the greater of: (A) one
or (B) a number equal to the number of current directors multiplied by NBC's
percentage ownership of NBCi common stock, rounded to the nearest whole number.
In addition, under the governance agreement NBC will have an option to
purchase additional shares of Class B common stock in an amount sufficient to
retain its percentage ownership interest in us as it stood immediately prior to
our issuance of the additional shares of common stock. This option will expire
when no shares of Class B common stock remain outstanding.
NBC and CNET have entered into a voting and right of first offer agreement
that requires, among other things, CNET to vote its shares of Class A common
stock in the same manner as NBC regarding a change of control transaction or a
transaction that would result in the acquisition or sale of 5% or more of our
equity securities should such transaction be submitted to our stockholders for
approval. CNET also grants a right of first offer to NBC under this agreement
with respect to any proposed sale or transfer of its Class A common stock to a
third party.
REGISTRATION RIGHTS AGREEMENT
We have entered into a registration rights agreement with NBC, GE
Investments Subsidiary, CNET, Flying Disc Investments Limited Partnership and
Chris Kitze.
SHELF REGISTRATION. Under the registration rights agreement, we have the
obligation to file a registration statement with the SEC upon the request of
NBC, CNET, Mr. Kitze or any of their respective transferees for an offering to
be made on a continuous basis covering a minimum of $50 million of shares of our
Class A common stock (valued at the time of such request) at any time following
the later of the 12-month anniversary of the date of the registration rights
agreement and the date upon which NBCi is first able to file such registration
statement on Form S-3.
DEMAND REGISTRATION RIGHTS. At any time and from time to time during which
there is no effective shelf registration statement covering all of the Class A
common stock registrable under the registration rights agreement, NBC, CNET,
Mr. Kitze or any of their respective transferees may make a written demand that
we effect the registration under the Securities Act of all or part of their
shares of Class A common stock, provided that:
- NBC and its transferees, on behalf of NBC and GE Investments Subsidiary,
shall have only four such demand rights, one of which can be made on
Form S-1 and one of which can be for a shelf registration;
- CNET and its transferees shall have only three such demand rights, two of
which can be made on Form S-1 and one of which can be for a shelf
registration;
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- Mr. Kitze, on behalf of himself and Flying Disc, shall have only three
such demand rights, one of which can be made on Form S-1 and one of which
can be for a shelf registration;
- the market value of the shares to be included in the demand registration
on Form S-1 must be at least $25,000,000, valued at the time of such
request;
- no demand can be made prior to six months after the effective date of the
immediately preceding demand registration; and
- in any underwritten offering, shares may be excluded by the underwriters
based on market conditions and marketing factors.
Priority of inclusion in demand registrations is given first to the party or
parties initiating the demand registration; then inclusion is pro rata among the
other parties based on the amount of shares requested to be included; provided
that the Class A common stock we request to be included in such offering will
comprise the lesser of 50% of the securities to be sold or all of the securities
requested to be included by us.
CNET will be entitled to exercise its initial demand right before other
parties for a period of 60 days following November 30, 1999. In such event, the
Class A common stock requested by CNET to be included in such offering may be
reduced to the lesser of 50% of the securities to be sold or all of the
securities requested to be included by CNET, with the remainder to be allocated
between us and Mr. Kitze.
PIGGYBACK REGISTRATION. If, at any time, we propose to register any of our
equity securities, whether for our own account or for the account of a third
party, each party may request that we include any or all of their shares in the
registration. Priority of inclusion in piggyback registrations is given first to
the party initiating the registration and us, then pro rata among the other
parties based on the amount of shares requested to be included. Securities of a
different class than those included by us may be excluded at the reasonable
discretion of the underwriters.
In the event we file a registration statement during the six month period
after the effective date of the registration statement filed as a result of
CNET's exercise of its initial demand right, the Class A common stock requested
by CNET to be included in such offering will comprise the lesser of 25% of the
securities to be sold or all of the securities requested to be included by CNET,
but will not exceed 1,000,000 shares of Class A common stock. However, if the
number of CNET's shares of Class A common stock included in such registration
exceeds 500,000, such inclusion shall be deemed an exercise by CNET of one of
its demand rights.
OTHER PROVISIONS. The registration rights agreement contains customary terms
and conditions for transactions of this type including provisions that we:
- will covenant to become S-3 eligible;
- will file any requested registration statement as soon as practicable but
in no event later than 45 days after the notice of demand or 90 days in
the case of the first demand registration; and
- will use its best efforts to cause the effectiveness of any registration
statement filed on behalf of the parties.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF OUR CERTIFICATE OF INCORPORATION AND
BYLAWS AND DELAWARE LAW
OUR CERTIFICATE OF INCORPORATION AND BYLAWS. Our bylaws provide that all
stockholder action must be effected at a duly called meeting of stockholders and
not by a consent in writing, except where the Class B common stock constitutes a
majority of our outstanding shares of common stock. The bylaws also provide that
only the chairman of the board, the chief executive officer or president, the
board of directors or the holders of a majority of the outstanding shares of
Class B common stock may call a special meeting of stockholders.
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<PAGE>
These provisions, the provisions of our certificate of incorporation
discussed above and NBC's ownership interest in us will make it more difficult
for our Class A common stockholders to replace the board of directors as well as
for another party to obtain control by replacing the board of directors. Since
the board of directors has the power to retain and discharge our officers, these
provisions could also make it more difficult for existing stockholders or
another party to effect a change in management.
These and other provisions may have the effect of deterring hostile
takeovers or delaying changes in control or management. These provisions are
intended to enhance the likelihood of continued stability in the composition of
the board of directors and in the policies furnished by the board of directors
and to discourage the types of transactions that may involve an actual or
threatened change of control. These provisions are designed to reduce our
vulnerability to an unsolicited acquisition proposal and are also intended to
discourage tactics that may be used in proxy fights. However, this could have
the effect of discouraging others from making tender offers for our shares and,
as a consequence, may inhibit fluctuations in the market price of our shares
that could result from actual or rumored takeover attempts. These provisions
also may have the effect of preventing changes in our management.
DELAWARE LAW. We are subject to Section 203 of the Delaware General
Corporation Law. This provision generally prohibits any Delaware corporation
from engaging in any business combination with any interested stockholder for a
period of three years following the date the stockholder became an interested
stockholder, unless:
- prior to that date the board of directors approved either the business
combination or the transaction that resulted in the stockholder becoming
an interested stockholder;
- upon completion of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock outstanding at the time the transaction
began; or
- on or following that date, the business combination is approved by the
board of directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the
outstanding voting stock that is not owned by the interested stockholder.
Section 203 defines business combination to include:
- any merger or consolidation involving the corporation and the interested
stockholder;
- any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation involving the interested stockholder;
- subject to certain exceptions, any transaction that results in the
issuance or transfer by the corporation of any stock of the corporation to
the interested stockholder;
- any transaction involving the corporation that has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
- the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by the entity or person.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our Class A common stock is BankBoston,
N.A. Its address is c/o Boston EquiServe Trust company, 150 Royall Street,
Canton, Massachusetts 02021, and its telephone number is (617) 575-6127.
117
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of our Class A common stock after
the offering could adversely affect the market price of the Class A common stock
and could impair our ability to raise capital through the sale of equity
securities. Upon completion of the offering, we will have outstanding 31,325,545
shares of Class A common stock, based on shares outstanding as of December 31,
1999. Of these shares, a total of 21,374,778 shares, including the 4,600,000
shares sold in this offering will be freely tradable without restriction under
the Securities Act, unless they are held by "affiliates" as defined under the
Securities Act.
Of the remaining shares of Class A common stock, 6,595,063 shares are
"restricted securities" within the meaning of Rule 144 under the Securities Act,
of which 97,479 shares are not saleable under Rule 144 until, at the earliest,
November 30, 2000. The remaining 6,497,584 shares held by CNET will be subject
to a lock-up agreement with Goldman, Sachs & Co. for a period of 270 days from
the date of this offering. This period will expire on October 30, 2000. After
this date, these shares are not saleable under Rule 144 until November 30, 2000,
although CNET may exercise its registration rights prior to such time. These
restricted securities may be sold in the public market only if registered or if
they qualify for an exemption from registration under Rules 144, 144(k), 145 or
701 promulgated under the Securities Act. In addition, with limited exceptions,
Chris Kitze and our officers and directors have agreed that they will not sell,
directly or indirectly, any common stock without the prior written consent of
Goldman, Sachs & Co. for a period of 90 days from the date of this offering.
This period will expire on May 3, 2000. One of our directors has also agreed not
to sell, directly or indirectly, any common stock he has received in connection
with his services as a director for a period of one year from the date of this
offering, which period will expire on February 3, 2001. Goldman, Sachs & Co.
may, however, in its sole discretion and at any time without notice, release all
or any portion of the shares subject to lock-up agreements. Subject to the
provisions of Rules 144 and 145, 3,326,715 shares and 28,989 shares will be
eligible for sale on May 3, 2000 and February 3, 2001, respectively, upon the
expiration of the lock-up agreements executed in connection with this offering.
In addition, we could issue additional shares of Class A common stock upon
the closing of potential acquisitions valued at $234 million, which if
consummated at the offering price of $81.375 per share, would result in the
issuance of 2,875,576 additional shares. There is no guarantee these
acquisitions will occur and the actual number of shares issuable, if any, will
not be determined until the closing of such acquisitions.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned shares of our common stock for at least one year would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of:
- 1% of the number of shares of common stock then outstanding, which will
equal approximately 313,255 shares immediately after this offering; or
- the average weekly trading volume of the common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice of Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions
and notice requirements and to the availability of current public information
about us. Under Rule 145, similar restrictions apply to the sales of common
stock after the consumation of a merger, absent the holding period requirements.
In November 1999, we filed a Form S-8 registration statement under the
Securities Act to register all shares of Class A common stock issuable pursuant
to outstanding options and all shares of common stock reserved for issuance
under our 1999 stock incentive plan. In addition, we intend to file a Form S-8
registration statement to register all shares of our Class A common stock
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issuable under our 1999 employee stock purchase plan. Registration statements on
Form S-8 become effective immediately upon filing, and shares covered by such
registration statements are therefore eligible for sale in the public markets,
subject to options becoming exercisable, the lock-up agreements described above
and Rule 144 and Rule 145 limitations applicable to affiliates. As of
December 31, 1999, there were outstanding options to purchase up to 8,514,299
shares of Class A common stock that will be eligible for sale in the public
market following the offering from time to time subject to becoming exercisable
and the expiration of the lock-up agreements, and an additional 4,366,454 shares
of Class A common stock were reserved for issuance under the 1999 stock
incentive plan and 300,000 shares of Class A common stock were reserved for
issuance under the 1999 employee stock purchase plan. See "Management--Benefit
Plans."
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<PAGE>
UNDERWRITING
NBCi, the selling stockholders and the underwriters for the offering named
below have entered into an underwriting agreement with respect to the shares
being offered. Subject to certain conditions, each underwriter has severally
agreed to purchase the number of shares indicated in the following table.
Goldman, Sachs & Co., Bear, Stearns & Co. Inc., Hambrecht & Quist LLC, Deutsche
Bank Securities Inc., FleetBoston Robertson Stephens Inc., Allen & Company
Incorporated, Banc of America Securities LLC, Gruntal & Co., L.L.C. and Salomon
Smith Barney Inc. are the representatives of the underwriters.
<TABLE>
<CAPTION>
Underwriters Number of Shares
- --------------------------------------------------------------------------------- ---------------------
<S> <C>
Goldman, Sachs & Co.............................................................. 1,794,000
Bear, Stearns & Co. Inc.......................................................... 1,122,000
Hambrecht & Quist LLC............................................................ 523,000
Deutsche Bank Securities Inc..................................................... 523,000
FleetBoston Robertson Stephens Inc............................................... 523,000
Allen & Company Incorporated..................................................... 23,000
Banc of America Securities LLC................................................... 46,000
Gruntal & Co., L.L.C............................................................. 23,000
Salomon Smith Barney Inc......................................................... 23,000
---------------------
Total............................................................................ 4,600,000
=====================
</TABLE>
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional 690,000
shares from NBCi and one of the selling stockholders to cover such sales. They
may exercise that option for 30 days. If any shares are purchased pursuant to
this option, the underwriters will severally purchase shares in approximately
the same proportion as set forth in the table above.
The following table shows the per share and total underwriting discounts and
commissions to be paid to the underwriters by NBCi. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares.
<TABLE>
<CAPTION>
Paid by NBC Internet, Inc.
------------------------------
No Exercise Full Exercise
-------------- --------------
<S> <C> <C>
Per Share.................................................... $ 4.232 $ 4.232
Total........................................................ $ 15,446,800 $ 17,097,280
</TABLE>
Shares sold by the underwriters to the public will initially be offered at
the initial price to public set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $2.53 per share from the initial price to public. Any such securities
dealers may resell any shares purchased from the underwriters to certain other
brokers or dealers at a discount of up to $.10 per share from the initial price
to public. If all the shares are not sold at the initial price to public, the
representatives may change the offering price and the other selling terms.
NBCi, the directors and executive officers of NBCi and one of the selling
stockholders have agreed with the underwriters, with limited exceptions, not to
dispose of or hedge any of their Class A common stock or securities convertible
into or exchangeable for shares of Class A common stock during the period from
the date of this prospectus continuing through the date 90 days after the date
of this prospectus, except with the prior written consent of Goldman, Sachs &
Co. In addition, one director of NBCi has agreed to extend this period so that
such committment is for a period of one year from the date of this prospectus.
The other selling stockholder has entered into a similar agreement with the
underwriters for the period from the date of this prospectus continuing through
a date 270 days after the date of this prospectus. The agreement with NBCi
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<PAGE>
does not apply to any existing employee benefit plans. See "Shares Eligible for
Future Sale" for a discussion of certain transfer restrictions.
In connection with the offering, the underwriters may purchase and sell
shares of Class A common stock in the open market. These transactions may
include short sales, stabilizing transactions and purchases to cover positions
created by short sales. Short sales involve the sale by the underwriters of a
greater number of shares than they are required to purchase in the offering.
Stabilizing transactions consist of certain bids or purchases made for the
purpose of preventing or retarding a decline in the market price of the Class A
common stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representatives have repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
These activities by the underwriters may stabilize, maintain or otherwise
affect the market price of the Class A common stock. As a result, the price of
the Class A common stock may be higher than the price that otherwise might exist
in the open market. If these activities are commenced, they may be discontinued
by the underwriters at any time. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.
As permitted by Rule 103 under the Exchange Act, certain underwriters (and
selling group members, if any) that are market makers ("passive market makers")
in the Class A common stock may make bids for or purchases of Class A common
stock in the Nasdaq National Market until a stabilizing bid has been made.
Rule 103 generally provides: a passive market maker's net daily purchases of the
Class A common stock may not exceed 30% of its average daily trading volume in
such securities for the two full consecutive calendar months, or any
60 consecutive days ending within the 10 days, immediately preceding the filing
date of the registration statement of which this prospectus forms a part, a
passive market maker may not effect transactions or display bids for the
Class A common stock at a price that exceeds the highest independent bid for the
Class A common stock by persons who are not passive market makers, and bids made
by passive market makers must be identified as such.
NBCi estimates that its share of the total expenses of the offerings,
excluding underwriting discounts and commissions, will be approximately
$1.5 million.
Up to 1,250,000 additional shares of Class A common stock (or up to
1,437,500 shares if the applicable over-allotment option is exercised in full)
may be delivered by the TRACES Trust to holders of its Automatic Common Exchange
Securities upon exchange of the Automatic Common Exchange Securities on the
exchange date (as defined in the Trust prospectus). In lieu of delivery of some
of such shares, CNET may elect to pay cash or deliver other securities on the
exchange date for each share of Class A common stock then deliverable in the
amounts and under the procedures described in the Trust prospectus. The
Automatic Common Exchange Securities are being offered through underwriting in
the manner described in the Trust prospectus. The respective closings of the
offerings of the Class A common stock and the Automatic Common Exchange
Securities are not dependent upon one another.
NBCi and the selling stockholders have agreed to indemnify the several
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
From time to time Bear, Stearns & Co. Inc. and Hambrecht & Quist LLC have
provided financial services to NBCi and its affiliates and received customary
fees for such services.
121
<PAGE>
LEGAL MATTERS
The validity of the Class A common stock offered hereby will be passed upon
for NBCi by Morrison & Foerster LLP, San Francisco, California. Certain legal
matters in connection with the offering will be passed upon for the underwriters
by Brobeck, Phleger & Harrison LLP, San Francisco, California.
EXPERTS
Ernst & Young LLP, independent auditors, have audited Xoom.com's
consolidated financial statements as of December 31, 1997 and 1998, and the
period from April 16, 1996 (inception) to December 31, 1996 and the years ended
December 31, 1997 and 1998; the financial statements of Paralogic Corporation as
of December 31, 1996 and 1997 and for each of the two years ended December 31,
1997; the financial statements of Global Bridges Technologies, Inc. as of
December 31, 1996 and 1997 and for the period from July 23, 1996 (inception)
through December 31, 1996 and for the year ended December 31, 1997; the
financial statements of Pagecount, Inc. as of December 31, 1997 and for the
period from January 23, 1997 (inception) through December 31, 1997; the
financial statements of MightyMail Networks, Inc. as of December 31, 1997 and
1998, and for each of the two years ended December 31, 1998 and the financial
statements of Paralogic Software Corporation as of December 31, 1998 and for the
period from February 11, 1998 (inception) through December 31, 1998, as set
forth in their reports. The financial statements of Xoom.com, Paralogic
Corporation, Global Bridges Technologies, Inc., Pagecount, Inc., MightyMail
Networks, Inc. and Paralogic Software Corporation have been included in this
prospectus and elsewhere in the registration statement in reliance on the
reports of Ernst & Young LLP, given on their authority as experts in accounting
and auditing.
The financial statements of LiquidMarket, Inc. as of December 31, 1998 and
for the period from June 12, 1998, date of inception, through December 31, 1998
included in this proxy statement/ prospectus, have been so included in reliance
on the report of PricewaterhouseCoopers LLP, independent accountants, given on
the authority of said firm as experts in accounting and auditing.
The financial statements and schedule of Snap as of December 31, 1997 and
1998, and for each of the years in the two-year period ended December 31, 1998,
have been included in this proxy statement/ prospectus in reliance upon the
report of KPMG LLP, independent certified public accountants, appearing
elsewhere herein, and upon the authority of said firm as experts in accounting
and auditing.
The combined financial statements of NBC Multimedia Division as of
December 31, 1997 and 1998 and for each of the years then ended have been
included herein and in the registration statement in reliance upon the report of
KPMG LLP, independent certified public accountants, appearing elsewhere herein,
and upon the authority of said firm as experts in accounting and auditing.
AVAILABLE INFORMATION
We have filed with Securities and Exchange Commission in Washington, D.C. a
Registration Statement on Form S-1 under the Securities Act with respect to the
Class A common stock offered in this prospectus. This prospectus, filed as part
of the Registration Statement, does not contain all of the information set forth
in the Registration Statement and its exhibits and schedules, certain portions
of which have been omitted as permitted by the rules and regulations of the SEC.
For further information about us and the Class A common stock, we refer you to
the Registration Statement and to its exhibits and schedules. Statements in this
prospectus about the contents of any contract, agreement or other document are
not necessarily complete and, in each instance, we refer you to the copy of such
contract, agreement or document filed as an exhibit to the
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Registration Statement, and each such statement being qualified in all respects
by reference to the document to which it refers. Anyone may inspect the
Registration Statement and its exhibits and schedules without charge at the
public reference facilities the SEC maintains at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the SEC located at 7 World
Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison Street,
Suite 1400, Chicago, Illinois, 60661. You may obtain copies of all or any part
of these materials from the SEC upon the payment of certain fees prescribed by
the SEC. You may also inspect these reports and other information without charge
at a Web site maintained by the SEC. The address of this site is
http://www.sec.gov.
We are subject to the informational requirements of the Exchange Act and in
accordance therewith file reports, proxy statements and other information with
the SEC. You will be able to inspect and copy these reports, proxy statements
and other information at the public reference facilities maintained by the SEC
and at the SEC's regional offices at the addresses noted above. You also will be
able to obtain copies of this material from the Public Reference Section of the
SEC as described above, or inspect them without charge at the SEC's Web site.
Our Class A common stock is quoted on the Nasdaq National Market. You may
inspect reports, proxy and information statements and other information
concerning us at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006.
123
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
NBC Internet, Inc. Unaudited Pro Forma Condensed Combined
Financial Information F-3
Unaudited Pro Forma Condensed Combined Balance Sheets..... F-4
Unaudited Pro Forma Condensed Combined Statements of
Operations.............................................. F-5-7
Notes to Unaudited Pro Forma Condensed Combined Financial
Information............................................. F-8-9
Xoom.com, Inc.
Report of Ernst & Young LLP, Independent Auditors......... F-10
Consolidated Balance Sheets............................... F-11
Consolidated Statements of Operations..................... F-12
Consolidated Statements of Stockholders' Equity
(Deficit)............................................... F-13
Consolidated Statements of Cash Flows..................... F-14-16
Notes to Consolidated Financial Statements................ F-17-42
Snap! LLC
Independent Auditor's Report.............................. F-43
Balance Sheets............................................ F-44
Statements of Operations.................................. F-45
Statements of Members' Equity (Deficit)................... F-46
Statements of Cash Flows.................................. F-47
Notes to Financial Statements............................. F-48-60
NBC Multimedia Division
Independent Auditor's Report.............................. F-61
Combined Balance Sheets................................... F-62
Combined Statements of Operations......................... F-63
Combined Statements of Cash Flows......................... F-64
Notes to Combined Financial Statements.................... F-65-71
Financial Statements related to Companies acquired by
Xoom.com, Inc.
Paralogic Corporation
Report of Ernst & Young LLP, Independent Auditors......... F-72
Balance Sheets............................................ F-73
Statements of Operations.................................. F-74
Statements of Stockholders' Equity (Deficit).............. F-75
Statements of Cash Flows.................................. F-76
Notes to Financial Statements............................. F-77-81
Global Bridges Technologies, Inc.
Report of Ernst & Young LLP, Independent Auditors......... F-82
Balance Sheets............................................ F-83
Statements of Operations.................................. F-84
Statements of Stockholders' Equity (Deficit).............. F-85
Statements of Cash Flows.................................. F-86
Notes to Financial Statements............................. F-87-91
Pagecount, Inc.
Report of Ernst & Young LLP, Independent Auditors......... F-92
Balance Sheets............................................ F-93
Statements of Income...................................... F-94
Statements of Stockholders' Equity........................ F-95
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Statements of Cash Flows.................................. F-96
Notes to Financial Statements............................. F-97-100
Paralogic Software Corporation
Report of Ernst & Young LLP, Independent Auditors......... F-101
Balance Sheets............................................ F-102
Statements of Operations.................................. F-103
Statements of Stockholders' Equity........................ F-104
Statements of Cash Flows.................................. F-105
Notes to Financial Statements............................. F-106-112
MightyMail Networks, Inc.
Report of Ernst & Young, LLP, Independent Auditors........ F-113
Balance Sheets............................................ F-114
Statements of Operations.................................. F-115
Statements of Stockholders' Equity (Deficit).............. F-116
Statements of Cash Flows.................................. F-117
Notes to Financial Statements............................. F-118-124
Liquid Market, Inc.
Report of PricewaterhouseCoopers LLP, Independent
Accountants............................................. F-125
Balance Sheets............................................ F-126
Statements of Operations.................................. F-127
Statements of Stockholders' Equity........................ F-128
Statements of Cash Flows.................................. F-129
Notes to Financial Statements............................. F-130-135
Xoom.com, Inc. Unaudited Pro Forma Condensed Combined
Financial Information
Introduction.............................................. F-136
Unaudited Pro Forma Condensed Combined Statements of
Operations.............................................. F-137-139
Notes to Unaudited Pro Forma Condensed Combined Financial
Information............................................. F-140
</TABLE>
F-2
<PAGE>
NBC INTERNET, INC.
UNAUDITED SELECTED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The following unaudited selected pro forma condensed combined financial
information for NBCi gives effect to the transactions among Xoom.com, NBC and
the NBC Multimedia Division, which consists of NBC.com, NBC-IN.com and
VideoSeeker, CNET and Snap. The following unaudited pro forma condensed combined
financial statements reflect the combination of the following:
- Xoom.com pro forma (represents pro forma combination of Xoom.com,
Paralogic Corporation, Global Bridges Technologies, Inc., PageCount, Inc.,
MightyMail Networks Inc., Paralogic Software Corporation and LiquidMarket,
Inc.);
- NBC.com;
- NBC-IN.com;
- VideoSeeker;
- CNET's ownership interest in Snap;
- NBC's ownership interest in Snap; and
- 10% equity interest in CNBC.com LLC.
The total purchase costs of the transactions have been calculated with
Xoom.com treated as the accounting acquiror and give effect to the purchase of
the NBC Multimedia Division and to NBCi's acquisition of CNET's and NBC's
ownership interests in Snap. The historical financial information has been
derived from the respective historical and/or pro forma financial statements of
Xoom.com, Snap, and the NBC Multimedia Division, and should be read in
conjunction with those financial statements and the related notes contained in
this prospectus.
The unaudited pro forma condensed combined balance sheet as of
September 30, 1999 has been prepared assuming the transactions took place as of
that date and includes the allocation of the total purchase consideration to the
fair values of the assets and liabilities of Snap and the NBC Multimedia
Division, based on a preliminary valuation.
The unaudited pro forma condensed combined statements of operations combine
the Xoom.com pro forma historical statements of operations and the historical
statements of operations of Snap and the NBC Multimedia Division for the year
ended December 31, 1998 and the nine months ended September 30, 1998 and 1999
and give effect to the transactions, including the amortization of goodwill and
other intangible assets, as if they had occurred at the beginning of each period
presented.
The unaudited pro forma condensed combined information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the transaction had
been consummated at the dates indicated, nor is it necessarily indicative of
future operating results or financial position of the combined companies and
should not be construed as representative of these amounts for any future dates
or periods.
As set forth in the pro forma condensed combined statements of operations,
NBCi experienced net losses for the nine months ended September 30, 1998 and
1999 and the year ended December 31, 1998. We believe that we have the financial
resources needed to meet the presently anticipated business requirements of
NBCi, including capital expenditure and strategic operating programs, for at
least the next 12 months. Thereafter, if cash generated by operations is
insufficient to satisfy our liquidity requirements, we may need to sell
additional equity or debt securities or obtain additional credit facilities. The
sale of additional equity or convertible debt securities may result in
additional dilution to our stockholders. We may not be able to raise any such
capital on terms acceptable to us or at all.
F-3
<PAGE>
NBC INTERNET, INC.
UNAUDITED PRO FORMA CONDENSED
COMBINED BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
--------------------------------------------------------------------------------
PRO FORMA
NBC BUSINESS
MULTIMEDIA COMBINATION
XOOM.COM SNAP DIVISION COMBINED ADJUSTMENTS PRO FORMA
----------- --------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
<CAPTION>
ASSETS
Current assets:
<S> <C> <C> <C> <C> <C> <C>
Cash and cash equivalents................... $ 75,409 $ 20 $ -- $ 75,429 $ (43,300)(F) $ 32,129
Short-term investments...................... 123,516 522 -- 124,038 -- 124,038
Accounts receivable, net.................... 4,032 3,926 571 8,529 -- 8,529
Note receivable from NBC.................... -- -- -- -- 78,288 (D) 78,288
Inventories................................. 518 -- -- 518 -- 518
Other current assets........................ 3,747 4,838 -- 8,585 -- 8,585
-------- --------- -------- --------- ---------- ----------
Total current assets.......................... 207,222 9,306 571 217,099 34,988 252,087
Fixed assets, net........................... 7,643 10,225 448 18,316 -- 18,316
Goodwill, net............................... 70,167 -- -- 70,167 1,567,927 (B) 1,638,094
Intangible assets, net...................... 25,370 -- -- 25,370 86,400 (B) 111,770
Investments................................. 69,780 32,607 -- 102,387 68,500 (B) 170,887
Note receivable from NBC, less current
portion................................... -- -- -- -- 261,712 (D) 261,712
Other assets................................ 8,890 2,502 -- 11,392 -- 11,392
-------- --------- -------- --------- ---------- ----------
Total assets.................................. $389,072 $ 54,640 $ 1,019 $ 444,731 $2,019,527 $2,464,258
======== ========= ======== ========= ========== ==========
LIABILITIES, STOCKHOLDERS' EQUITY, MEMBERS'
EQUITY AND PARENT COMPANY'S INVESTMENT AND
NET ADVANCES
Current liabilities:
Accounts payable............................ $ 5,115 $ 5,450 $ 1,751 $ 12,316 $ 23,500 (B) $ 35,816
Accrued compensation and related expenses... 1,355 5,249 240 6,844 -- 6,844
Other accrued liabilities................... 2,747 -- -- 2,747 -- 2,747
Deferred revenue............................ 2,409 4,569 17,878 24,856 (20,163)(E) 4,693
Notes payable............................... 241 -- -- 241 -- 241
Due to CNET................................. -- 1,788 -- 1,788 -- 1,788
Due to NBC.................................. -- 101 -- 101 -- 101
Capital lease obligations................... 84 -- -- 84 -- 84
Contingency accrual......................... 1,000 -- -- 1,000 -- 1,000
-------- --------- -------- --------- ---------- ----------
Total current liabilities..................... 12,951 17,157 19,869 49,977 3,337 53,314
Convertible notes payable to NBC and its
affiliates, less current portion............ -- -- -- -- 370,000 (A) 370,000
Deferred revenue, less current portion........ 2,380 -- -- 2,380 -- 2,380
Other notes payable, less current portion..... 292 -- -- 292 -- 292
Capital lease obligations, less current
portion..................................... 164 -- -- 164 -- 164
Line of credit................................ -- 43,300 -- 43,300 (43,300)(F) --
Stockholders' equity, Members' equity and
Parent Company's investment and net
advances:
Common stock................................ 407,669 -- -- 407,669 1,664,823 (A) 2,072,492
Members' equity............................. -- 94,358 -- 94,358 (94,358)(C) --
Parent Company's investment and net
advances.................................. -- -- (18,850) (18,850) 18,850 (C) --
Notes receivable from stockholders.......... (995) -- -- (995) -- (995)
Deferred compensation....................... (409) (7,705) -- (8,114) 7,705 (C) (409)
Unrealized gain............................. -- 22,731 -- 22,731 (22,731)(C) --
Accumulated deficit......................... (32,980) (115,201) -- (148,181) 115,201 (C) (32,980)
-------- --------- -------- --------- ---------- ----------
Total stockholders' equity, members' equity
and parent company's investment and net
advances:................................... 373,285 (5,817) (18,850) 348,618 1,689,490 2,038,108
-------- --------- -------- --------- ---------- ----------
Total liabilities and stockholders' equity,
members' equity and parent company's
investment and net advances:................ $389,072 $ 54,640 $ 1,019 $ 444,731 $2,019,527 $2,464,258
======== ========= ======== ========= ========== ==========
</TABLE>
See accompanying notes.
F-4
<PAGE>
NBC INTERNET, INC.
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
------------------------------------------------------------------------------------
PRO FORMA
NBC BUSINESS
XOOM.COM MULTIMEDIA COMBINATION
PRO FORMA(1) SNAP DIVISION COMBINED ADJUSTMENTS PRO FORMA
------------- -------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenue...................... $ 5,673 $ 3,310 $ 6,929 $ 15,912 $ -- $ 15,912
Cost of net revenue.............. 2,263 5,613 3,513 11,389 -- 11,389
-------- -------- --------- --------- ------------- ---------
Gross profit (loss).............. 3,410 (2,303) 3,416 4,523 -- 4,523
Operating expenses:
Operating and development...... 2,695 4,231 775 7,701 -- 7,701
Sales and marketing............ 1,680 6,110 2,862 10,652 -- 10,652
General and administrative..... 2,782 3,108 3,724 9,614 -- 9,614
Purchased in-process research
and development.............. 330 -- -- 330 460 (G) 790
Amortization of deferred
compensation................. 1,248 -- -- 1,248 -- 1,248
Amortization of goodwill and
other intangible assets...... 20,712 -- -- 20,712 182,745 (H) 203,457
Promotion and advertising
provided by NBC.............. -- 3,484 -- 3,484 -- 3,484
-------- -------- --------- --------- ------------- ---------
Total operating expenses......... 29,447 16,933 7,361 53,741 183,205 236,946
-------- -------- --------- --------- ------------- ---------
Loss from operations............. (26,037) (19,236) (3,945) (49,218) (183,205) (232,423)
Other income (expense):
Interest and other income...... 39 36 -- 75 12,990 (I) 13,065
Interest and other expense..... (19) -- -- (19) (11,199)(J) (11,218)
-------- -------- --------- --------- ------------- ---------
Net loss......................... $(26,017) $(19,200) $ (3,945) $ (49,162) $ (181,414) $(230,576)
======== ======== ========= ========= ============= =========
Basic and diluted net loss per
share.......................... (K) $ (5.64)
=========
Shares used in per share
calculation--basic and
diluted........................
(K) 40,888
=========
</TABLE>
- ------------------------------
(1) Represents pro forma combination of Xoom.com, Paralogic Corporation, Global
Bridges Technologies, Inc., PageCount, Inc., MightyMail Networks, Inc.,
Paralogic Software Corporation and LiquidMarket, Inc., beginning on page
F-136 of this prospectus.
See accompanying notes.
F-5
<PAGE>
NBC INTERNET, INC.
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
------------------------------------------------------------------------------------
PRO FORMA
NBC BUSINESS
XOOM.COM MULTIMEDIA COMBINATION
PRO FORMA(1) SNAP DIVISION COMBINED ADJUSTMENTS PRO FORMA
------------- -------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenue...................... $ 9,200 $ 7,317 $ 11,615 $ 28,132 $ -- $ 28,132
Cost of net revenue.............. 3,857 7,626 5,249 16,732 -- 16,732
-------- -------- --------- --------- ------------- ---------
Gross profit (loss).............. 5,343 (309) 6,366 11,400 -- 11,400
Operating expenses:
Operating and development...... 4,339 6,263 938 11,540 -- 11,540
Sales and marketing............ 3,160 12,482 3,989 19,631 -- 19,631
General and administrative..... 4,110 5,939 4,489 14,538 -- 14,538
Purchased in-process research
and development.............. 330 -- -- 330 460 (G) 790
Amortization of deferred
compensation................. 1,605 160 -- 1,765 -- 1,765
Amortization of goodwill and
other intangible assets...... 27,620 -- -- 27,620 243,661 (H) 271,281
Promotion and advertising
provided by NBC.............. -- 14,060 -- 14,060 -- 14,060
-------- -------- --------- --------- ------------- ---------
Total operating expenses......... 41,164 38,904 9,416 89,484 244,121 333,605
-------- -------- --------- --------- ------------- ---------
Loss from operations............. (35,821) (39,213) (3,050) (78,084) (244,121) (322,205)
Other income (expense):
Interest and other income...... 192 -- -- 192 16,793 (I) 16,985
Interest and other expense..... (145) (75) -- (220) (14,998)(J) (15,218)
Interest expense related to
warrant...................... (1,494) -- -- (1,494) -- (1,494)
-------- -------- --------- --------- ------------- ---------
Net loss......................... $(37,268) $(39,288) $ (3,050) $ (79,606) $ (242,326) $(321,932)
======== ======== ========= ========= ============= =========
Basic and diluted net loss per
share.......................... (K) $ (7.74)
=========
Shares used in per share
calculation--basic and
diluted........................
(K) 41,595
=========
</TABLE>
- ------------------------------
(1) Represents pro forma combination of Xoom.com, Paralogic Corporation, Global
Bridges Technologies, Inc., PageCount, Inc., MightyMail Networks, Inc.,
Paralogic Software Corporation and LiquidMarket, Inc., beginning on page
F-136 of this prospectus.
See accompanying notes.
F-6
<PAGE>
NBC INTERNET, INC.
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------------------------------------------------
PRO FORMA
NBC BUSINESS
XOOM.COM MULTIMEDIA COMBINATION
PRO FORMA(1) SNAP DIVISION COMBINED ADJUSTMENTS PRO FORMA
------------- -------- ----------- ---------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net revenue...................... $ 20,194 $ 23,000 $ 12,490 $ 55,684 $ -- $ 55,684
Cost of net revenue.............. 7,657 6,878 4,574 19,109 -- 19,109
-------- -------- --------- --------- ------------- ---------
Gross profit..................... 12,537 16,122 7,916 36,575 -- 36,575
Operating expenses:
Operating and development...... 7,180 8,410 391 15,981 -- 15,981
Sales and marketing............ 13,960 20,976 1,042 35,978 -- 35,978
General and administrative..... 7,727 9,799 2,099 19,625 -- 19,625
Purchased in-process research
and development.............. -- -- -- -- 2,603 (G) 2,603
Amortization of deferred
compensation................. 3,441 3,207 -- 6,648 -- 6,648
Amortization of goodwill and
other intangible assets...... 21,500 -- -- 21,500 182,745 (H) 204,245
Promotion and advertising
provided by NBC.............. -- 32,950 -- 32,950 -- 32,950
-------- -------- --------- --------- ------------- ---------
Total operating expenses......... 53,808 75,342 3,532 132,682 185,348 318,030
-------- -------- --------- --------- ------------- ---------
(Loss) income from operations.... (41,271) (59,220) 4,384 (96,107) (185,348) (281,455)
Other income (expense):
Interest and other income...... 6,228 -- -- 6,228 12,990 (I) 19,218
Interest and other expense..... (93) (1,125) -- (1,218) (11,199)(J) (12,417)
-------- -------- --------- --------- ------------- ---------
Net (loss) income................ $(35,136) $(60,345) $ 4,384 $ (91,097) $ (183,557) $(274,654)
======== ======== ========= ========= ============= =========
Basic and diluted net loss per
share.......................... (K) $ (5.77)
=========
Shares used in per share
calculation--basic and
diluted........................ (K) 47,616
=========
</TABLE>
- ------------------------------
(1) Represents pro forma combination of Xoom.com, MightyMail Networks Inc.,
Paralogic Software Corporation and LiquidMarket, Inc., beginning on page
F-136 of this prospectus.
See accompanying notes.
F-7
<PAGE>
NBC INTERNET, INC.
NOTES TO THE SELECTED UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The total estimated purchase cost has been allocated on a preliminary basis to
assets and liabilities based on management's estimate of their fair values, with
Xoom.com treated as the accounting acquiror. The excess of the purchase cost
over the fair value of the net assets acquired has been allocated to goodwill.
The final purchase price allocation will be calculated based on NBC Multimedia's
and Snap's balance sheets and Snap's stock options outstanding at November 30,
1999, the date the transaction was consummated.
The adjustments to the unaudited pro forma condensed combined balance sheet
as of September 30, 1999, have been calculated as if the transactions occurred
on September 30, 1999 and are as follows:
(A)(1)To reflect the acquisition by NBCi of NBC.com, NBC-IN.com and VideoSeeker,
NBC Multimedia's ownership interest in Snap, and a 10% ownership interest in
CNBC.com for an estimated purchase price of $2,058,323,000. The purchase
consideration consists of the following:
- Issuance of 23,590,680 shares of NBCi Class B common stock with a fair
value of $1,103,336,000. The fair value per share of Xoom.com's common
stock is being used to determine the purchase price, as Xoom.com is
treated as the accounting acquiror. Therefore, the fair value per share
of NBCi's common stock issued is based on the average closing price of
Xoom.com's common stock on June 14, 1999 (the date of the announcement
of the stock purchase agreement between Xoom.com and NBC) and the three
days prior and subsequent to such date.
- Issuance of (i) a zero coupon convertible note of NBCi with a principal
at maturity of $39,447,953; and (ii) a zero coupon convertible note of
NBCi with a principal at maturity of $447,416,805. The convertible
notes payable have been recorded at their present value of
approximately $370,000,000, with an effective interest rate of 4% per
annum.
(2)To reflect the issuance of 7,245,063 shares of NBCi's Class A common stock
with a fair value per share of $46.77 for an aggregate amount of
$338,852,000 or approximately 81% (39% on a fully diluted basis) of Snap.
The fair value per share of NBCi's common stock issued is based on the
average closing price of Xoom.com's common stock on June 14, 1999 (the
announcement date of the stock purchase agreement between Xoom.com and NBC)
and the three days prior and subsequent to such date.
(B)(1)To reflect the additional estimated purchase price of $246,135,000 related
to (i) the assumption of Snap's options and (ii) estimated merger costs.
This additional estimated purchase price of $246,135,000 consists of the
following:
- Assumption of options to purchase 3,407,558 shares of NBCi's Class A
common stock with a fair value of $222,635,000. The fair value of the
options assumed is based on the Black-Scholes model using the following
assumptions:
- Fair market value of the underlying shares is based on the average
closing price of Xoom.com's common stock on June 14, 1999 and the three
days prior and subsequent to such date.
- Expected life of 3 to 4 years
- Expected volatility of 1.0
- Risk free interest rate of 5.96%
- Expected dividend rate of 0%
F-8
<PAGE>
NBC INTERNET, INC.
NOTES TO THE SELECTED UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION (CONTINUED)
- Estimated related merger costs consisting of the following:
<TABLE>
<S> <C>
Investment banking fees $17,250,000
Attorney, accountant and printing fees 4,250,000
Filing and registration costs 400,000
Merger-related restructuring costs 1,600,000
-----------
$23,500,000
===========
</TABLE>
(2) To allocate the total purchase price of the transaction of $2,058,323,000
and recognize the excess purchase cost of $1,722,827,000 over the fair value
of the net tangible assets acquired, which has been recorded as goodwill and
other intangible assets as follows:
<TABLE>
<S> <C>
Purchased technology $ 18,900,000
Investment in CNBC.com LLC 68,500,000
Affiliate and other contracts 31,400,000
Acquired workforce 1,900,000
License agreement to NBC brand name and content, and
other
brand name 34,200,000
Goodwill 1,567,927,000
--------------
$1,722,827,000
==============
</TABLE>
(C) To reflect the elimination of (i) the historical members' equity accounts of
Snap and (ii) the historical parent company investment and net advances of
the NBC Multimedia Division.
(D) To record the assignment to NBCi of a note of NBC in the amount of $340.0
million ($78,288,000 current portion and $261,712,000 long-term portion),
with a term of 4 years and an interest rate of 5.4% per annum.
(E) To eliminate the gross margin associated with the Snap deferred revenue and
to eliminate the deferred revenue of the NBC Multimedia Division.
(F) To record the repayment by NBCi of Snap's revolving line of credit.
The adjustments to the unaudited pro forma condensed combined statements of
operations for the year ended December 31, 1998 and the nine months ended
September 30, 1999, assume that the transaction occurred as of January 1, 1998
and January 1, 1999, respectively and are as follows:
(G) To reinstate charges for in-process research and development related to
Xoom.com's acquisitions of Paralogic Corporation and Pagecount, Inc. in the
year ended December 31, 1998 and MightyMail Networks and Paralogic Software
Corporation in the nine months ended September 30, 1999.
(H) To reflect the amortization of goodwill and other intangible assets
resulting from the transactions. The goodwill and other intangible assets
are being amortized over periods ranging from 3 to 7 years.
(I) To reflect interest income in connection with the note receivable assigned
to NBCi by NBC.
(J) To reflect interest charges in connection with the two zero coupon
convertible notes issued to NBC and its affiliates using an effective
interest rate of 4% per annum.
(K) Basic and diluted net loss per share has been adjusted to reflect the
issuance of (i) 7,245,063 shares of Class A common stock to CNET and an
unaffiliated third party; and (ii) 23,590,680 shares of NBCi's Class B
common stock to an affiliate of NBC, as if the shares had been outstanding
for the entire period. The effect of stock options assumed in the
transactions has not been included, as its inclusion would be anti-dilutive.
F-9
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders of Xoom.com, Inc.
We have audited the accompanying consolidated balance sheets of Xoom.com,
Inc. as of December 31, 1997 and 1998, and the related consolidated statements
of operations, stockholders' equity (deficit) and cash flows for the period from
April 16, 1996 (inception) through December 31, 1996 and for the years ended
December 31, 1997 and 1998. These financial statements are the responsibility of
Xoom.com, Inc.'s management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Xoom.com, Inc. at December 31, 1997 and 1998, and the consolidated results of
its operations and its cash flows for the period from April 16, 1996 (inception)
through December 31, 1996 and for the years ended December 31, 1997 and 1998 in
conformity with generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
Palo Alto, California
January 25, 1999
F-10
<PAGE>
XOOM.COM, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 6 $ 54,575 $ 75,409
Marketable securities..................................... -- 2,000 123,516
Accounts receivable, net of allowance for doubtful
accounts of
$49, $195, and $554 in 1997, 1998, and 1999,
respectively............................................ 173 1,368 4,032
Stock subscription receivable............................. 75 -- --
Inventories............................................... -- 322 518
Other current assets...................................... 1 308 3,747
------- -------- --------
Total current assets.................................... 255 58,573 207,222
Fixed assets, net........................................... 414 2,071 7,643
Goodwill, net............................................... -- 3,751 70,167
Purchased technology, net................................... -- 1,766 24,845
Acquired workforce, net..................................... -- -- 525
Investments................................................. -- -- 69,780
Prepaid royalties and licenses.............................. 53 216 --
Other assets................................................ 60 497 8,890
------- -------- --------
Total assets.......................................... $ 782 $ 66,874 $389,072
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 462 $ 1,229 $ 5,115
Accrued compensation and related expenses................. 38 497 1,355
Other accrued liabilities................................. 5 1,531 2,831
Deferred revenue.......................................... -- 443 2,409
Note payable to stockholder............................... 150 -- --
Notes payable............................................. -- 1,276 157
Capital lease obligations................................. -- 37 84
Contingency accrual....................................... 1,000 1,000 1,000
------- -------- --------
Total current liabilities............................... 1,655 6,013 12,951
Deferred revenue, less current portion.................... -- -- 2,380
Notes payable, less current portion....................... -- 411 292
Capital lease obligations, less current portion........... -- 117 164
Stockholders' equity (deficit):
Preferred stock, $0.0001 par value:
Authorized shares--5,000,000
Issued and outstanding shares--none in 1997, 1998, and
1999.................................................. -- -- --
Common stock, $0.0001 par value:
Authorized shares--80,000,000
Issued and outstanding shares--5,541,367, 13,699,555,
and 20,461,673 in 1997, 1998 and 1999, respectively... 3,001 75,606 407,669
Notes receivable from stockholders.......................... -- -- (995)
Deferred compensation....................................... (303) (904) (409)
Accumulated deficit......................................... (3,571) (14,369) (32,980)
------- -------- --------
Total stockholders' equity (deficit).................... (873) 60,333 373,285
------- -------- --------
Total liabilities and stockholders' equity
(deficit)........................................... $ 782 $ 66,874 $389,072
======= ======== ========
</TABLE>
See accompanying notes.
F-11
<PAGE>
XOOM.COM, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1996
(INCEPTION) YEARS ENDED NINE MONTHS ENDED
THROUGH DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------- -------------------------
1996 1997 1998 1998 1999
--------------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenue:
E-commerce......................... $ -- $ 327 $ 5,582 $ 3,366 $ 10,257
Advertising........................ -- 60 2,144 953 9,527
License fees....................... -- 454 592 546 119
------ ------- -------- ------- --------
Total net revenue................ -- 841 8,318 4,865 19,903
Cost of net revenue:
Cost of e-commerce................. -- 171 3,542 1,965 7,458
Cost of advertising................ -- -- -- -- 183
Cost of license fees............... -- 148 42 35 4
------ ------- -------- ------- --------
Total cost of net revenue........ -- 319 3,584 2,000 7,645
------ ------- -------- ------- --------
Gross profit......................... -- 522 4,734 2,865 12,258
Operating expenses:
Operating and development.......... 266 1,150 3,841 2,558 5,708
Sales and marketing................ 23 292 2,834 1,570 13,507
General and administrative......... 150 721 3,366 2,158 6,846
Purchased in-process research and
development...................... -- -- 790 790 2,603
Amortization of deferred
compensation..................... -- 248 1,416 1,111 495
Amortization of intangible
assets........................... -- -- 1,843 1,087 7,836
Non-recurring charges.............. -- 1,243 -- -- --
------ ------- -------- ------- --------
Total operating expenses......... 439 3,654 14,090 9,274 36,995
------ ------- -------- ------- --------
Loss from operations................. (439) (3,132) (9,356) (6,409) (24,737)
Other income (expense):
Interest income.................... -- -- 187 37 6,213
Interest expense................... -- -- (135) (20) (90)
Interest expense related to
warrant.......................... -- -- (1,494) -- --
------ ------- -------- ------- --------
Net loss............................. $ (439) $(3,132) $(10,798) $(6,392) $(18,614)
====== ======= ======== ======= ========
Net loss per share--basic and
diluted............................ $(0.89) $ (0.64) $ (1.37) $ (0.89) $ (1.11)
====== ======= ======== ======= ========
Number of shares used in per share
calculation--basic and diluted..... 496 4,874 7,879 7,172 16,780
====== ======= ======== ======= ========
</TABLE>
See accompanying notes.
F-12
<PAGE>
XOOM.COM, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
NOTES TOTAL
COMMON STOCK RECEIVABLE STOCKHOLDERS'
---------------------- FROM DEFERRED ACCUMULATED EQUITY
SHARES AMOUNT STOCKHOLDERS COMPENSATION DEFICIT (DEFICIT)
---------- --------- ------------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock to founders
at inception....................... 666,668 $ -- $ -- $ -- $ -- $ --
Issuance of common stock in exchange
for cancellation of notes payable
to stockholders.................... 2,666,667 1,000 -- -- -- 1,000
Net loss............................. -- -- -- -- (439) (439)
---------- -------- ----- ------ -------- --------
Balances at December 31, 1996.......... 3,333,335 1,000 -- -- (439) 561
Issuance of common stock for cash.... 1,914,452 1,223 -- -- -- 1,223
Issuance of common stock in exchange
for cancellation of notes payable
to stockholders.................... 38,889 35 -- -- -- 35
Issuance of common stock in exchange
for stock subscription
receivable......................... 254,691 175 -- -- -- 175
Issuance of stock options to
consultants........................ -- 17 -- -- -- 17
Deferred compensation related to
grant of stock options............. -- 551 -- (551) -- --
Amortization of deferred
compensation....................... -- -- -- 248 -- 248
Net loss............................. -- -- -- -- (3,132) (3,132)
---------- -------- ----- ------ -------- --------
Balances at December 31, 1997.......... 5,541,367 3,001 -- (303) (3,571) (873)
Issuance of common stock for cash,
net of issuance costs of $139...... 1,815,432 5,532 -- -- -- 5,532
Issuance of common stock in exchange
for Classic Media Holdings license
rights............................. 43,292 100 -- -- -- 100
Issuance of common stock in
connection with acquisitions....... 1,221,992 4,219 -- -- -- 4,219
Issuance of common stock in exchange
for cancellation of notes payable
to stockholders.................... 64,937 150 -- -- -- 150
Issuance of common stock in exchange
for stock subscription
receivable......................... 78,224 261 -- -- -- 261
Issuance of common stock to directors
and consultants in exchange for
services........................... 19,564 205 -- -- -- 205
Issuance of stock options to
consultants........................ -- 238 -- -- -- 238
Issuance of common stock in initial
public offering, net of offering
costs of $7,059.................... 4,600,000 57,341 -- -- -- 57,341
Issuance of common stock upon
exercise of warrants, net of
issuance costs of $28.............. 314,747 1,048 -- -- -- 1,048
Issuance of warrant in connection
with loan agreement................ -- 1,494 -- -- -- 1,494
Deferred compensation related to
grant of stock options............. -- 2,017 -- (2,017) -- --
Amortization of deferred
compensation....................... -- -- -- 1,416 -- 1,416
Net loss............................. -- -- -- -- (10,798) (10,798)
---------- -------- ----- ------ -------- --------
Balances at December 31, 1998.......... 13,699,555 75,606 -- (904) (14,369) 60,333
Issuance of common stock in
connection with acquisitions
(unaudited)........................ 2,017,338 101,055 -- -- -- 101,055
Issuance of common stock to directors
and consultants in exchange for
services (unaudited)............... 12,822 638 -- -- -- 638
Issuance of common stock in secondary
public offering, net of offering
costs of $8,950 (unaudited)........ 2,659,800 166,597 -- -- -- 166,597
Issuance of common stock upon
exercise of warrants (unaudited)... 116,231 -- -- -- -- --
Issuance of common stock for cash
(unaudited)........................ 960,028 55,000 -- -- -- 55,000
Value of warrants issued in
connection with ValueVision
strategic alliance................. -- 6,937 -- -- -- 6,937
Issuance of common stock upon
exercise of options (unaudited).... 995,899 1,836 -- -- -- 1,836
Notes receivable from stockholders
(unaudited)........................ -- -- (995) -- -- (995)
Amortization of deferred compensation
(unaudited)........................ -- -- -- 495 -- 495
Unrealized gain on investments
(unaudited)........................ -- -- -- -- 3 3
Net loss (unaudited)................. -- -- -- -- (18,614) (18,614)
---------- -------- ----- ------ -------- --------
Balances at September 30, 1999
(unaudited).......................... 20,461,673 $407,669 $(995) $ (409) $(32,980) $373,285
========== ======== ===== ====== ======== ========
</TABLE>
See accompanying notes.
F-13
<PAGE>
XOOM.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1996
(INCEPTION) YEARS ENDED NINE MONTHS ENDED
THROUGH DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------- -------------------------
1996 1997 1998 1998 1999
--------------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS USED IN OPERATING
ACTIVITIES:
Net loss........................................ $ (439) $(3,132) $(10,798) $ (6,392) $(18,614)
Adjustments to reconcile net loss to net cash
and cash equivalents used in operating
activities:
Interest expense related to warrant......... -- -- 1,494 -- --
Purchased in-process research and
development............................... -- -- 790 790 2,603
Depreciation and amortization............... 2 254 796 481 1,280
Amortization of intangible assets........... -- -- 1,843 1,087 7,836
Amortization of deferred compensation....... -- 248 1,416 1,111 495
Write-off of prepaid royalties.............. -- 243 -- -- --
Issuance of common stock in exchange for
Classic Media Holdings license rights..... -- -- 100 100 --
Issuance of stock options to consultants.... -- 17 238 189 --
Issuance of common stock to directors and
consultants............................... -- -- 205 87 638
Changes in operating assets and liabilities:
Accounts receivable....................... -- (173) (1,167) (634) (2,517)
Inventories............................... -- -- (322) (379) (196)
Other current assets...................... -- (1) (303) (116) (3,433)
Intangible assets......................... -- -- -- (24) --
Prepaid royalties and licenses............ (324) (186) (426) (282) --
Other assets.............................. (19) (41) (445) (1,144) (7,577)
Accounts payable.......................... 136 326 762 1,047 3,886
Accrued compensation and related
expenses................................ 9 29 418 289 530
Other accrued liabilities................. -- 5 1,403 645 (729)
Deferred revenue.......................... -- -- 443 -- 858
Contingency accrual....................... -- 1,000 -- -- --
------- ------- -------- -------- --------
NET CASH AND CASH EQUIVALENTS USED IN OPERATING
ACTIVITIES.................................... (635) (1,411) (3,553) (3,145) (14,940)
CASH AND CASH EQUIVALENTS USED IN INVESTING
ACTIVITIES:
Purchases of fixed assets..................... (64) (392) (1,954) (1,099) (6,169)
Purchase of investments....................... -- -- (2,000) -- (198,450)
Maturities of investments..................... -- -- -- -- 18,500
Business combinations, net of cash acquired... -- -- (458) (329) (901)
Cash paid in connection with the purchase of
certain assets from Revolutionary Software,
Inc......................................... -- -- (273) (20) --
------- ------- -------- -------- --------
NET CASH AND CASH EQUIVALENTS USED IN
INVESTING ACTIVITIES........................ (64) (392) (4,685) (1,448) (187,020)
</TABLE>
See accompanying notes.
F-14
<PAGE>
XOOM.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1996
(INCEPTION) YEARS ENDED NINE MONTHS ENDED
THROUGH DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------- -------------------------
1996 1997 1998 1998 1999
--------------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH AND CASH EQUIVALENTS PROVIDED BY FINANCING
ACTIVITIES:
Proceeds from issuance of common stock in
initial public offering..................... $ -- $ -- $ 57,341 $ -- $ --
Proceeds from issuance of common stock in
secondary public offering................... -- -- -- -- 166,597
Proceeds from issuance of common stock........ -- 1,223 5,532 5,532 55,000
Proceeds from exercise of warrants............ -- -- 1,048 -- --
Proceeds from exercise of options............. -- -- -- -- 1,836
Proceeds from issuance of notes payable to
stockholders................................ 700 185 -- 335 --
Proceeds from repayment of stock subscriptions
receivable.................................. -- 400 335 -- --
Proceeds from notes payable................... -- -- 1,762 -- --
Principal payments on capital lease
obligations................................. -- -- (10) (2) (31)
Principal payments on notes payable........... -- -- (3,201) (311) (608)
------- ------- -------- -------- --------
NET CASH AND CASH EQUIVALENTS PROVIDED BY
FINANCING ACTIVITIES........................ 700 1,808 62,807 5,554 222,794
------- ------- -------- -------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1 5 54,569 961 20,834
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD...................................... -- 1 6 6 54,575
------- ------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD.... $ 1 $ 6 $ 54,575 $ 967 $ 75,409
======= ======= ======== ======== ========
</TABLE>
See accompanying notes.
F-15
<PAGE>
XOOM.COM, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
APRIL 16, 1996
(INCEPTION) YEARS ENDED NINE MONTHS ENDED
THROUGH DECEMBER 31, SEPTEMBER 30,
DECEMBER 31, ------------------- -------------------------
1996 1997 1998 1998 1999
--------------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES:
NON-CASH TRANSACTIONS:
Issuance of common stock in exchange for stock
subscriptions receivable.................... $ -- $ 175 $ 261 $ 261 $ 995
======= ======= ======== ======== ========
Issuance of notes payable to stockholders for
stock subscriptions receivable.............. $ 300 $ -- $ -- $ -- $ --
======= ======= ======== ======== ========
Issuance of common stock in exchange for
cancellation of notes payable to
stockholder................................. $ 1,000 $ 35 $ 150 $ 150 $ --
======= ======= ======== ======== ========
Deferred compensation resulting from grant of
stock options............................... $ -- $ 551 $ 2,017 2,002 $ --
======= ======= ======== ======== ========
Fixed assets acquired under capital lease
obligations................................. $ -- $ -- $ 165 $ 162 $ 125
======= ======= ======== ======== ========
Common stock issued to satisfy Paralogic
Corporation legal obligation................ $ -- $ -- $ 165 $ 165 $ --
======= ======= ======== ======== ========
Investment in a company in connection with a
media contract.............................. $ -- $ -- $ -- $ -- $ 5,000
======= ======= ======== ======== ========
Issuance of common stock in conjunction with
business and technology acquisitions.......... $ -- $ -- $ 4,218 $ 3,618 $101,055
======= ======= ======== ======== ========
Issuance of notes payable in conjunction with
business and technology acquisitions.......... $ -- $ -- $ 3,105 $ 3,025 $ --
======= ======= ======== ======== ========
Value of equity securities received in exchange
for entering into strategic alliances......... $ -- $ -- $ -- $ -- $ 429
======= ======= ======== ======== ========
Value of warrant received in connection with
ValueVision Inc. strategic alliance........... $ -- $ -- $ -- $ -- $ 6,343
======= ======= ======== ======== ========
Value of warrant issued in connection with
ValueVision Inc. strategic alliance $ -- $ -- $ -- $ -- $ 6,937
======= ======= ======== ======== ========
CASH FLOW INFORMATION:
Cash paid for interest........................ $ -- $ -- $ 57 $ 20 $ 59
======= ======= ======== ======== ========
</TABLE>
See accompanying notes.
F-16
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Xoom.com, Inc. (the "Company"), was formerly known as XOOM, Inc., Xoom
Software, Inc. and originally incorporated as Atomsoft, Inc. in the State of
Delaware on April 16, 1996.
The Company provides free community services such as Web site hosting,
e-mail, on-line chat networks and free proprietary content such as clip art and
greeting cards. The Company uses these free services and content to build a
membership base to direct market goods and services targeted to the interests of
its members. The Company derives a substantial portion of its revenue from
e-commerce, and to a lesser extent from advertising and licensing.
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant intercompany transactions and
balances have been eliminated in consolidation.
DEPENDENCE ON CERTAIN VENDORS
The Company currently depends on one vendor to provide warehousing and order
fulfillment. Although the Company believes that there are alternative vendors
for warehousing and order fulfillment, there can be no assurance that the
Company will maintain its relationship with this vendor as the agreement is
cancelable at any time. The loss of this relationship could have a material
adverse effect on the Company's financial condition and results of operations.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported results of operations during the reporting period. Actual results
could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim financial information as of September 30, 1998 and 1999, and for
the nine months ended September 30, 1998 and 1999, is unaudited but has been
prepared on the same basis as the audited financial statements and includes all
adjustments, consisting only of normal recurring adjustments, that the Company
considers necessary for a fair presentation of its financial position at such
date and its results of operations and cash flows for those periods. Operating
results for the nine months ended September 30, 1998 and 1999 are not
necessarily indicative of results that may be expected for any future periods.
CASH AND CASH EQUIVALENTS
The Company considers investments in highly liquid instruments purchased
with original maturities of 90 days or less to be cash equivalents. Cash
equivalents are recorded at cost, which
F-17
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
approximates fair value. The Company maintains its cash in depository accounts
with three high credit quality financial institutions.
CONCENTRATIONS OF CREDIT RISK AND CREDIT EVALUATIONS
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of trade accounts receivable. The Company conducts
business with companies in various industries throughout the world and with
individuals over the Internet. The Company performs ongoing credit evaluations
of its corporate customers and generally does not require collateral. Sales to
individuals are principally paid for via credit cards. Reserves are maintained
for potential credit losses, and such losses to date have been within
management's expectations. The Company provided $49,000 and $269,000 for
allowance for doubtful accounts in 1997 and 1998, respectively.
For the year ended December 31, 1997, one customer accounted for $100,000 or
12% of total net revenue. No balances were receivable from that customer at
December 31, 1997. For the year ended December 31, 1998, no single customer
accounted for greater than 10% of total net revenue.
INVENTORIES
Inventories are carried at the lower of cost (determined on the average cost
basis) or market. Inventories consist of products available for sale.
FIXED ASSETS
Fixed assets are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of three years. Fixed assets under capital leases are
amortized over the shorter of the estimated useful life or the life of the
lease. The Company identifies and records impairment losses on fixed assets when
events and circumstances indicate that such assets might be impaired. To date,
no such impairment has been recorded.
GOODWILL AND PURCHASED TECHNOLOGY, NET
Goodwill and purchased technology consist of purchased technology and
goodwill related to acquisitions accounted for by the purchase method. See
Note 2. Amortization of these purchased intangibles is provided on the
straight-line basis over the respective useful lives of the assets, which ranges
from two to four years. Purchased in-process research and development without
alternative future use is expensed when acquired.
The Company identifies and records impairment losses on intangible assets
when events and circumstances indicate that such assets might be impaired. To
date, no such impairment has been recorded.
F-18
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREPAID ROYALTIES AND LICENSES
Prepaid royalties represent prepayments of royalties due upon the sale or
sublicense of software technologies. Prepaid royalties are amortized as units
are sold or over estimated useful lives of approximately one year, whichever is
shorter. Licenses represent amounts paid to developers for fully paid licenses
to resell certain software. These licenses are amortized over the estimated
useful lives which are approximately one year. Amortization of prepaid royalties
and licenses, which is included in cost of e-commerce and cost of license fee
revenue, totaled $0, $213,000 and $263,000, for the period from April 16, 1996
(inception) to December 31, 1996, and for the years ended December 31, 1997 and
1998, respectively.
During the second quarter of 1997, the Company discontinued the sale of
certain products where royalty prepayments had been made and accordingly,
recorded a write-off of prepaid royalties included in non-recurring charges
totaling $243,000.
OTHER ASSETS
Other assets consist of non-current deposits relating to various ongoing
agreements entered into by the Company.
DEFERRED REVENUE
Deferred revenue consists of advertising and e-commerce fees to be earned in
the future under agreements existing at the balance sheet date.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("FAS 109"), which requires the use of the liability method in accounting for
income taxes. Under FAS 109, deferred tax assets and liabilities are measured
based on differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees under the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and has adopted the
disclosure-only alternative of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123").
REVENUE RECOGNITION
E-COMMERCE
The Company recognizes revenue from e-commerce sales when the products are
shipped to customers. The Company provides for potential product returns and
estimated warranty costs in the period of the sale. Such costs have been minimal
to date.
F-19
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ADVERTISING
Advertising revenues are derived from the sale of banner advertisements and
sponsorships under short-term contracts. Through December 31, 1998, the duration
of the Company's advertising commitments has been principally from one to two
months to a year. Advertising revenues on banner contracts are recognized
ratably in the period in which the advertisement is displayed, provided that no
significant Company obligations remain and collection of the resulting
receivable is probable. Company obligations typically include the guarantee of a
minimum number of "impressions" or times that an advertisement appears in pages
viewed by the users of the Company's online properties. To the extent minimum
guaranteed impressions are not met, the Company defers recognition of the
corresponding revenue until the remaining guaranteed impression levels are
achieved.
LICENSE FEES
The Company licenses software under non-cancelable license agreements to
end-users and non-cancelable sub-license agreements to resellers. License fee
revenues are recognized when a non-cancelable license agreement has been signed,
the product has been delivered, there are no uncertainties surrounding product
acceptance, the fees are fixed and determinable, collection is considered
probable and all significant contractual obligations have been satisfied.
EXPORT SALES
Export sales were 30% and 25% of net revenues for the years ended
December 31, 1997 and 1998, respectively. The Company's export sales are as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
North America.............................................. $ 39 $ 288
Europe..................................................... 157 1,008
Asia/Pacific............................................... 44 392
Rest of the World.......................................... 12 365
------ ------
Total................................................ $ 252 $2,053
====== ======
</TABLE>
ADVERTISING EXPENSE
All advertising costs are expensed when incurred. Advertising costs, which
are included in sales and marketing expense, were $0, $50,000 and $51,000, for
the period from April 16, 1996 (inception) through December 31, 1996, and for
the years ended December 31, 1997 and 1998, respectively.
F-20
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEVELOPMENT COSTS
Development costs are expensed as incurred and are included in operating and
development expenses.
COMPUTATION OF NET LOSS PER SHARE
The Company computes net loss per share based on Financial Accounting
Standards Board Statement No. 128, "Earnings Per Share," ("SFAS 128"). In
accordance with SFAS 128, basic net income (loss) per share excludes dilutive
common stock equivalents and is calculated as net income (loss) divided by the
weighted average number of common shares outstanding. Diluted net income (loss)
per share is computed using the weighted average number of common shares
outstanding and dilutive common stock equivalents outstanding during the period.
Common equivalent shares from stock options and warrants (using the treasury
stock method) are excluded from the calculation of net loss per share as their
effect is anti-dilutive.
RECENT ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998 the Company adopted Financial Accounting Standards
Board Statement No. 130 ("SFAS 130"), "Reporting Comprehensive Income," which
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. The Company
had no material components of comprehensive income for the year ended
December 31, 1998. Accordingly, the Company's comprehensive loss for the year
ended December 31, 1998 is equal to its reported loss. The Company's
comprehensive loss for the nine months ended September 30, 1999 was
approximately $18.6 million.
Additionally, the Financial Accounting Standards Board issued Financial
Accounting Standards Board Statement No. 131 ("SFAS 131") "Disclosure about
Segments of an Enterprise and Related Information," which establishes standards
for the way public business enterprises report information in annual statements
and interim financial reports regarding operating segments, products and
services, geographic areas, and major customers. This statement is effective for
financial statements for periods beginning after December 15, 1997. The Company
adopted SFAS 131 in 1998. The Company operates in one business segment, Internet
service to customers.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1 ("SOP 98-1"), "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use", which establishes guidelines
for the accounting for the costs of all computer software developed or obtained
for internal use. The Company is required to adopt SOP 98-1 effective
January 1, 1999. The adoption of SOP 98-1 is not expected to have a material
impact on the Company's consolidated financial statements.
2. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS
During the year ended December 31, 1998 and the nine months ended
September 30, 1999, the Company made the business and technology acquisitions
described in the paragraphs that follow, each of which has been accounted for as
a purchase. The consolidated financial statements include the operating results
of each business from the date of acquisition.
F-21
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
2. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS (CONTINUED)
PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT. The amounts allocated to
purchased research and development were determined through established valuation
techniques in the high-technology Internet industry and were expensed upon
acquisition, because technological feasibility had not been established and no
future alternative uses existed. The values assigned to purchased in-process
technology were determined by identifying the on-going research projects for
which technological feasibility had not been achieved and assessing the state of
completion of the research and development effort. The state of completion was
determined by estimating the costs and time incurred to date relative to those
costs and time to be incurred to develop the purchased in-process technology
into commercially viable products, estimating the resulting net cash flows only
from the percentage of research and development efforts complete at the date of
acquisition, and discounting the net cash flows back to their present value. The
discount rate included a factor that took into account the uncertainty
surrounding the successful development of the purchased in-process technology
projects.
PURCHASED TECHNOLOGY. To determine the values of purchased technology, the
expected future cash flows of the existing developed technologies were
discounted taking into account the characteristics and applications of the
product, the size of existing markets, growth rates of existing and future
markets as well as an evaluation of past and anticipated product lifecycles.
ACQUIRED WORKFORCE. To determine the values of the acquired workforce,
employees were identified who would require significant cost to replace and
train. Then each employee's fully-burdened cost (salary, benefits, overhead),
the cost to train the employee, and the recruiting costs (locating,
interviewing, hiring) were estimated. These costs were then summed up and tax
effected to estimate the value of the assembled workforce.
Amounts allocated to purchased technology, goodwill and other intangible
assets for the business acquisitions that follow are being amortized on a
straight-line basis over periods of two to four years.
PARALOGIC CORPORATION
On March 10, 1998, the Company acquired 100% of the outstanding shares of
Paralogic Corporation. Paralogic Corporation provides free communication between
members via a chat Web site network (i.e., chat rooms). The purchase
consideration was $3,038,000 consisting of 682,410 shares of common stock with
an estimated fair value of $2.31 per share, $1,400,000 of debt, and $62,000 of
acquisition costs. Contingent consideration, which the Company does consider
probable of paying, consists of an additional $860,000, included in debt above,
which will be paid if certain performance criteria are met.
F-22
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
2. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS (CONTINUED)
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows (in thousands):
<TABLE>
<S> <C>
Cash........................................................ $ 33
Accounts receivables and other current assets............... 9
Fixed assets, net........................................... 50
Purchased in-process research and development charged to
operations in the quarter ended March 31, 1998............ 330
Purchased technology........................................ 160
Goodwill.................................................... 2,539
Liabilities assumed......................................... (83)
----------
Total purchase consideration.......................... $ 3,038
==========
</TABLE>
GLOBAL BRIDGES TECHNOLOGIES, INC.
On June 11, 1998, the Company acquired 100% of the outstanding shares of
Global Bridges Technologies, Inc. ("GBT"). GBT owns the exclusive selling rights
to Sitemail, an HTML-based e-mail product, which expands the Company's suite of
member services. The purchase consideration was $709,000 consisting of 183,427
shares of common stock with an estimated fair value of $3.33 per share, $13,000
cash, a note payable of $63,000 with fixed payment terms and $22,000 of
acquisition costs.
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows (in thousands):
<TABLE>
<S> <C>
Other current assets........................................ $ 4
Goodwill.................................................... 767
Liabilities assumed......................................... (62)
--------
Total purchase consideration................................ $ 709
========
</TABLE>
In July 1998, the Company amended the purchase agreement with GBT to provide
for the issuance of an additional 17,304 shares of common stock with an
estimated fair value of $10.80 per share. Upon completion of the Company's
initial public offering, GBT received $200,000 of the Company's common stock at
$14 per share and additional cash consideration of $130,000. This additional
consideration was recorded as goodwill, raising the total consideration to
$1,226,000.
REVOLUTIONARY SOFTWARE, INC.
On June 11, 1998, the Company purchased certain technology of Revolutionary
Software, Inc. ("RSI"). RSI is the developer of the Sitemail technology and had
licensed Sitemail to GBT. The purchase consideration was $701,000, consisting of
128,052 shares of common stock with an estimated fair value of $3.33 per share,
$12,000 cash and a note payable of $263,000 with fixed payment terms. Initially,
RSI may earn up to an additional 34,608 shares of common stock if certain
performance targets are met. In each of the twenty-four months following
June 1998, the
F-23
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
2. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS (CONTINUED)
stockholders of RSI will receive 5% of net revenues less certain costs from
e-commerce and banner advertising from e-mail subscribers of certain Internet
service providers.
The purchase consideration of the acquired assets was allocated based on
fair values as follows (in thousands):
<TABLE>
<S> <C>
Purchased in-process research and development charged to
operations in the quarter ended June 30, 1998............. $ 330
Purchased technology........................................ 371
--------
Total purchase consideration................................ $ 701
========
</TABLE>
In July 1998, the Company amended the agreement with RSI to provide for the
issuance of an additional 34,608 shares of common stock with an estimated fair
value of $10.80 per share. Upon completion of the Company's initial public
offering, RSI received $400,000 of the Company's common stock at $14 per share
and additional cash consideration of $260,000. This additional consideration was
recorded as purchased technology, raising the total consideration to $1,735,000.
The purchase consideration above the purchased in-process research and
development and purchased technology amounts were also included in purchased
technology.
ARCAMAX, INC.
In June 1998, the Company purchased certain intellectual property and
licensed certain technology from ArcaMax, Inc. for $644,000, consisting of
133,334 shares of common stock with an estimated fair value of $3.33 per share,
$20,000 cash and a note payable of $180,000 with fixed payment terms. This
technology acquisition gave the Company the ability to offer a free online
greeting card service to members. The Company recorded this amount as purchased
technology and is amortizing it over its estimated useful life of two years.
PAGECOUNT, INC.
On July 24, 1998, the Company acquired substantially all of the assets of
Pagecount, Inc. The consideration was $1,460,000 and consisted of $200,000 cash,
a note payable of $1,200,000 with fixed payment terms, and acquisition costs of
approximately $60,000.
F-24
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
2. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS (CONTINUED)
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows (in thousands):
<TABLE>
<S> <C>
Cash........................................................ $ 32
Accounts receivable and other current assets................ 19
Fixed assets, net........................................... 21
Purchased in-process research and development charged to
operations in the quarter ended September 30, 1998........ 130
Purchased technology........................................ 140
Goodwill.................................................... 1,164
Liabilities assumed......................................... (46)
----------
Total purchase consideration................................ $ 1,460
==========
</TABLE>
FOCUSED PRESENCE, INC.
On April 1, 1999, the Company acquired 100% of the outstanding shares of
Focused Presence, Inc., a company that operates a global directory of small
businesses. The purchase consideration consisted of 21,894 shares of the
Company's common stock with an estimated fair value of $77.23 per share, and
acquisition costs of approximately $4,000.
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows (in thousands):
<TABLE>
<S> <C>
Cash........................................................ $ 1
Other current assets........................................ 61
Fixed assets, net........................................... 3
Goodwill.................................................... 1,760
Liabilities assumed......................................... (130)
------
Total purchase consideration................................ $1,695
======
</TABLE>
MIGHTYMAIL NETWORKS, INC.
On May 3, 1999, the Company acquired 100% of the outstanding shares of
MightyMail Networks, Inc., a developer of an enhanced e-mail product that
enables customization of e-mail according to user preferences. The purchase
consideration consisted of 268,761 shares of the Company's common stock with an
estimated fair value of $71.10 per share, the assumption of 9,061 and 12,121
employee stock options at a price per share of $70.47 and $55.91, respectively,
and acquisition costs of approximately $300,000. In addition, 67,186 shares of
the Company's common stock were placed into an escrow account. Of the shares
held in escrow, 25% will be released in November 1999 and in May 2000, if
certain performance objectives are met, and the remaining 50% will be released
in May 2000, upon the expiration of certain indemnification obligations.
F-25
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
2. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS (CONTINUED)
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows (in thousands):
<TABLE>
<S> <C>
Accounts receivable......................................... $ 19
Net fixed assets............................................ 132
Other long-term assets...................................... 50
Notes receivable from stockholders.......................... 995
Purchased in-process research and development charged to
operations in the quarter ended June 30, 1999............. 1,082
Purchased technology........................................ 3,321
Acquired workforce.......................................... 176
Goodwill.................................................... 17,735
Liabilities assumed......................................... (396)
-------
Total purchase consideration................................ $23,114
=======
</TABLE>
NET FLOPPY, INC.
On May 5, 1999, the Company acquired 100% of the outstanding shares of Net
Floppy, Inc., a provider of online file storage for web users. The purchase
consideration consisted of 7,528 shares of the Company's common stock with an
estimated fair value of $71.10 per share, approximately $560,000 in cash, and
approximately $57,000 of acquisition costs. In addition, 7,526 shares of the
Company's common stock were placed into an escrow account. Of the shares held in
escrow, 50% will be released if certain performance objectives are met in
November 1999 and 50% will be released in May 2000, upon the expiration of
certain indemnification obligations.
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows (in thousands):
<TABLE>
<S> <C>
Accounts receivable and other current assets................ $ 2
Goodwill.................................................... 1,443
Liabilities assumed......................................... (5)
------
Total purchase consideration................................ $1,440
======
</TABLE>
PARALOGIC SOFTWARE CORPORATION
On June 16, 1999, the Company acquired 100% of the outstanding shares of
Paralogic Software Corporation, a provider of Java based community products and
services, such as customizable chat rooms, discussion boards, guestbooks and
event calendars. The purchase consideration consisted of 654,018 shares of
common stock at an estimated fair value of $47.13 per share, the assumption of
82,733 and 12,001 employee stock options at a price per share of $46.67 and
$33.05, respectively, and acquisition costs of approximately $315,000.
F-26
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
2. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS (CONTINUED)
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows (in thousands):
<TABLE>
<S> <C>
Cash........................................................ $ 134
Accounts receivable and other current assets................ 21
Net fixed assets............................................ 43
Purchased in-process research and development charged to
operations in the quarter ended June 30, 1999............. 1,521
Purchased technology........................................ 4,986
Acquired workforce.......................................... 81
Goodwill.................................................... 28,639
Liabilities assumed......................................... (29)
-------
Total purchase consideration................................ $35,396
=======
</TABLE>
LIQUIDMARKET, INC.
On August 3, 1999, the Company acquired 100% of the outstanding shares of
LiquidMarket, Inc., the developer of a next-generation on-line comparison
shopping guide and purchasing service. The purchase consideration consisted of
718,224 shares of common stock at an estimated fair value of $40.70 per share,
the assumption of 54,490, 52,948, and 23,132 employee stock options at a price
per share of $40.29, $40.06, and $26.90, respectively, and acquisition costs of
approximately $300,000. In addition, 212,202 shares of the Company's common
stock were placed into an escrow account. Of the shares held in escrow, 50% will
be released on various milestone dates prior to June 2000, upon the completion
of certain performance objectives, and 50% will be released in August 2000, upon
the expiration of certain indemnification obligations.
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows (in thousands):
<TABLE>
<S> <C>
Cash........................................................ $ 378
Accounts receivable and other current assets................ 5
Net fixed assets............................................ 362
Purchased technology........................................ 16,700
Acquired workforce.......................................... 321
Goodwill.................................................... 21,116
Liabilities assumed......................................... (135)
-------
Total purchase consideration................................ $38,747
=======
</TABLE>
PRIVATE ONE, INC.
On August 3, 1999, the Company acquired 100% of the outstanding shares of
Private One, Inc., a designer and developer of a secure e-mail software service.
The purchase consideration consisted of 47,999 shares of common stock at an
estimated fair value of $40.70 per
F-27
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
2. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS (CONTINUED)
share and acquisition costs of approximately $3,000. In addition, 12,000 shares
of the Company's common stock will be placed into an escrow account. Of the
shares held in escrow, 25% will be released in February 2000, and 25% in
August 2000, or upon the completion of certain milestones, whichever is earlier.
The remaining 50% of the shares held in escrow will be released in August 2000,
upon the expiration of certain indemnification obligations.
The purchase consideration was allocated to the acquired assets and assumed
liabilities based on fair values as follows (in thousands):
<TABLE>
<S> <C>
Cash........................................................ $ 1
Net fixed assets............................................ 16
Goodwill.................................................... 2,209
Liabilities assumed......................................... (25)
------
Total purchase consideration................................ $2,201
======
</TABLE>
SUMMARY OF PURCHASED IN-PROCESS RESEARCH AND DEVELOPMENT AND PURCHASED
TECHNOLOGY. Values assigned to purchased in-process research and development and
purchased technology were generally determined using an income approach. To
determine the value of in-process research and development, the Company
considered, among other factors, the state of completion of each project, the
time and cost needed to complete each project, expected income, and associated
risks which included the inherent difficulties and uncertainties in completing
the project and thereby achieving technological feasibility and risks related to
the viability of and potential changes to future target markets. This analysis
results in amounts assigned to in-process research and development projects that
had not yet reached technological feasibility (as defined and utilized by the
Company in assessing software capitalization) and does not have alternative
future uses. To determine the value of the purchased technology, the expected
future cash flows of each existing technology product were discounted taking
into account risks related to the characteristics and applications of each
product, existing and future markets and assessments of the life cycle stage of
the product. Based on the analysis, the existing technology that had reached
technological feasibility was capitalized. The intangible assets as of
September 30, 1999 are summarized as follows (in thousands):
<TABLE>
<S> <C>
Acquired workforce.......................................... $ 578
Purchased technology........................................ 27,362
Goodwill.................................................... 77,275
-------
Intangible assets........................................... 105,215
Accumulated amortization.................................... (9,678)
-------
Intangible assets, net...................................... $95,537
=======
</TABLE>
F-28
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
2. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS (CONTINUED)
The total purchased in-process research and development that had no
alternative future use, and as such was charged to operations in the year ended
December 31, 1998 and the nine months ended September 30, 1999, is summarized
below (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------- --------------
<S> <C> <C>
Paralogic Corporation......................... $330 $ --
Revolutionary Software, Inc................... 330 --
Pagecount, Inc................................ 130 --
MightyMail Networks, Inc...................... -- 1,082
Paralogic Software Corporation................ -- 1,521
---- ------
Total purchased in-process research and
development................................. $790 $2,603
==== ======
</TABLE>
The following unaudited pro forma summary represents the consolidated
results of operations as if all the acquisitions to date had occurred at the
beginning of the periods presented (in thousands, except for per share data):
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -------------------
1997 1998 1998 1999
-------- -------- -------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Pro forma net revenue............... $ 1,371 $ 8,607 $ 5,364 $ 20,318
Pro forma loss from operations...... $(5,835) $(10,005) $(27,780) $(47,368)
Pro forma net loss.................. $(5,883) $(11,495) $(27,763) $(41,234)
Pro forma net loss per share--basic
and diluted....................... $ (1.02) $ (1.41) $ (2.59) $ (2.10)
Number of shares used in pro forma
per share calculation--basic and
diluted........................... 5,740 8,142 10,727 19,655
</TABLE>
The pro forma results are not necessarily indicative of what actually would
have occurred if the acquisitions had been in effect for the entire period
presented and are not intended to be a projection of future results. In-process
research and development charges of $0 and $460,000 were excluded from the pro
forma net loss and pro forma net loss per share figures for the years ended
December 31, 1997 and 1998, respectively. In-process research and development
charges of $460,000 and $2,603,000 were excluded from the pro forma net loss and
pro forma net loss per share figures for the periods ended September 30, 1998
and 1999, respectively.
NBC INTERNET, INC.
On May 9, 1999, the Company, certain subsidiaries of the Company, Snap! LLC,
National Broadcasting Company, Inc., and certain of its affiliates and
CNET, Inc. entered into a series of definitive agreements relating to the
formation of a new company to be named NBC Internet, Inc.
F-29
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
2. BUSINESS COMBINATIONS AND TECHNOLOGY ACQUISITIONS (CONTINUED)
On each of June 11, 1999, and July 8, 1999, an amendment to one of each of the
definitive agreements was signed. The terms of the original agreement and each
amendment are filed with the Securities and Exchange Commission. On November 24,
1999 the Company convened a meeting of the stockholders and ratified and
approved the NBC Internet Inc. related agreements.
3. RELATED PARTY TRANSACTIONS
During the period from April 16, 1996 (inception) through December 31, 1996,
and during the years ended December 31, 1997 and 1998, the Company issued stock
subscriptions receivable to related parties and to investors in exchange for
shares of common stock and, in some cases, notes payable. These subscriptions
receivable were due upon demand and bore no interest. As of December 31, 1998
there were no outstanding amounts due under subscriptions receivable.
During the period from April 16, 1996 (inception) through December 31, 1996,
and during the years ended December 31, 1997 and 1998, the Company issued notes
payable to related parties in exchange for cash advances and stock subscriptions
receivable. All notes payable issued through December 31, 1998 have been
converted into shares of common stock.
The Company entered into a Consulting Agreement (the "Agreement"), dated
May 15, 1998, with an outside director of the Company. The Agreement provides
for the director to receive monthly compensation of $10,000, paid in the form of
common stock. The director also received options to buy 16,667 shares of the
Company's common stock. The options vest at the rate of 12.5% per quarter over
two years. The director was granted stock options to buy an additional 16,667
shares of common stock which fully vested upon completion of the Company's
initial public offering.
The Company has entered into a Content License Agreement dated February 22,
1998, with Classic Media Holdings, whereby the Company was granted certain
non-exclusive perpetual, world-wide licensing rights in connection with Classic
Media Holdings' library of public domain movies. As consideration for the
license, the Company issued 43,290 shares of the Company's common stock to the
principals of Classic Media Holdings. The fair value of the stock yielded a
$100,000 charge to operating and development expense in the year ended
December 31, 1998. A director of the Company is a principal of Classic Media
Holdings.
4. CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES
The Company has classified all short-term investments as available-for-sale.
Available-for-sale securities are carried at amounts that approximate fair
market value based on quoted market prices. Realized gains and losses and
declines in value judged to be other-than-temporary on available-for-sale
securities are included in interest income. Interest earned on securities
classified as available-for-sale is also included in interest income.
F-30
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
4. CASH AND CASH EQUIVALENTS AND MARKETABLE SECURITIES (CONTINUED)
The following is a summary of available-for-sale securities (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, (UNAUDITED)
-------------------- SEPTEMBER 30,
1997 1998 1999
--------- -------- --------------
<S> <C> <C> <C>
Demand and money market instrument
accounts............................... $ 6 $ 8,731 $ 75,825
Corporate bonds and notes................ -- 36,444 98,614
Market auction preferred stock........... -- 11,400 24,300
Equity investments....................... -- -- 183
Unrealized gain on investments........... -- -- 3
--------- -------- --------
6 56,575 198,925
Less amounts included in cash and cash
equivalents............................ (6) (54,575) (75,409)
--------- -------- --------
Short-term investments................... $ -- $ 2,000 $123,516
========= ======== ========
</TABLE>
Unrealized gains and losses at December 31, 1997 and 1998 and realized gains
and losses for the years then ended, were not material. The Company has made a
provision for such amounts in its September 30, 1999 consolidated balance sheet
and recorded an unrealized gain of $3,000 in 1999. The cost of securities sold
is based on the specific identification method. All available-for-sale
securities at December 31, 1998 and September 30, 1999 have maturity dates in
1999 or 2000. In addition the Company has long-term marketable securities of
$58.6 million as of September 30, 1999.
5. FIXED ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
Fixed assets consist of the following (in thousands): -------- --------
<S> <C> <C>
Computers and equipment, including assets under capital
leases of $0 and $53 for 1997 and 1998, respectively...... $457 $2,528
Furniture and fixtures under capital leases................. -- 112
---- ------
Fixed assets................................................ 457 2,640
Less accumulated depreciation and amortization, including
amounts related to assets under capital leases of $0 and
$18 for 1997 and 1998, respectively....................... (43) (569)
---- ------
$414 $2,071
==== ======
</TABLE>
F-31
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
6. NOTES PAYABLE
Notes payable consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
(IN THOUSANDS)
<S> <C>
Note payable and other amounts due to the former
stockholders of Paralogic Corporation. The note is
non-interest bearing and payable in minimum monthly
installments of $30,000 through September 1999. Additional
payments are required for the $860,000 of contingent
consideration payable as the amounts are earned. As of
December 31, 1998, $2,248 of the contingent consideration
had been earned and paid.................................. $ 1,128
Note payable issued in connection with a secured financing
agreement (the "Agreement") with a leasing company. The
Agreement provides for borrowings of up to a cumulative
amount of $1,000,000 through July 31, 1999. All borrowings
under the Agreement are collateralized by computer and
office equipment and bear interest at the rate of 14.58%
annually. Payments are made monthly over 42 months from
the date of each borrowing in the amount of 2.87% of the
amount borrowed, plus a final payment equal to 10% of the
amount borrowed........................................... 512
Note payable to the former stockholder of Global Bridges
Technologies, Inc. bearing interest of 5% annually. The
note is due in monthly installments of $2,500 through July
2000...................................................... 47
-------
1,687
Less amounts due within one year from December 31, 1998..... (1,276)
-------
Long-term notes payable..................................... $ 411
=======
</TABLE>
Scheduled maturities of notes payable and other amounts due are as follows
(in thousands):
<TABLE>
<S> <C>
Year ending December 31,
1999.................................................... $1,276
2000.................................................... 155
2001.................................................... 159
2002.................................................... 97
------
Total............................................... $1,687
======
</TABLE>
On November 3, 1998, the Company entered into a loan agreement with a financing
company which provided for borrowings up to $2,750,000. The loan bore interest
of 12% annually. All amounts borrowed under this loan agreement were secured by
certain fixed assets. Pursuant to the terms of the loan agreement, the Company
issued the lender a warrant to purchase 183,333 shares of the Company's common
stock at an exercise price equal to the initial public offering price per share.
The Company determined that the fair value of the warrant to be $1,494,000 at
the date of the initial public offering, and in connection with this issuance
recorded the fair value as interest expense. The effective interest rate on this
secured loan agreement for the year ended December 31, 1998 was approximately
1,450%. As of December 31, 1998, all outstanding principal and interest amounts
had been fully paid and the loan agreement had been canceled.
F-32
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
7. INCOME TAXES
There has been no provision for U.S. federal or state income taxes for any
period as the Company has incurred operating losses.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets for federal and state income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1997 1998
-------- --------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards....................... $ 537 $ 1,944
Purchased in-process technology........................ -- 311
Capitalized start up costs............................. 112 85
Prepaid royalties and licenses......................... 257 496
Accrued liabilities.................................... 398 887
Other.................................................. 17 50
------- -------
Total deferred tax assets................................ 1,321 3,773
Valuation allowance...................................... (1,321) (3,773)
------- -------
Net deferred tax assets.................................. $ -- $ --
======= =======
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance as it is more likely
than not that the deferred tax assets will not be realized.
During the period from April 16, 1996 (inception) through December 31, 1996,
and during the years ended December 31, 1997 and 1998, the valuation allowance
for the deferred tax assets increased by $175,000, $1,146,000 and $2,452,000,
respectively.
As of December 31, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $4,878,000. There can be no
assurance that the Company will realize the benefit of the net operating loss
carryforwards. The federal net operating loss carryforwards will expire at
various dates beginning in the fiscal year 2011 through 2018 if not utilized.
Due to the "change of ownership" provisions of the Internal Revenue Code,
the availability of the Company's net operating loss and credit carryforwards
will be subject to an annual limitation against taxable income in future periods
if a change in ownership of more than 50% of the value of the Company's stock
should occur over a three year period, which could substantially limit the
eventual utilization of these carryforwards.
8. COMMITMENTS
The Company leases its facilities, furniture and fixtures and certain
computers and equipment under noncancelable leases for varying periods through
2007. The cost of assets acquired under
F-33
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
8. COMMITMENTS (CONTINUED)
capital leases during the year ended December 31, 1998 was $165,000.
Amortization expense related to these assets of $18,000 is included in
accumulated depreciation and amortization at December 31, 1998. The following
are the minimum lease obligations under these leases at December 31, 1998 (in
thousands):
<TABLE>
<CAPTION>
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
1999.......................................... $ 63 $ 379
2000.......................................... 63 385
2001.......................................... 63 383
2002.......................................... 17 387
2003.......................................... -- 411
Thereafter.................................... -- 1,637
---- ------
Minimum lease payments........................ 206 $3,582
======
Less amount representing interest............. (52)
----
Present value of minimum lease payments....... 154
----
Less current portion.......................... (37)
----
Long-term portion............................. $117
====
</TABLE>
Rent expense under operating lease arrangements for the period from
April 16, 1996 (inception) through December 31, 1996, and for the years ended
December 31, 1997 and 1998, totaled $5,000, $43,000 and $386,000, respectively.
In August 1999, the Company entered into a 10-year non-cancelable leasing
agreement for approximately 187,000 square feet of office space located in
San Francisco, California. Minimum lease commitments for the years ended
December 31, 1999, 2000, 2001, 2002, 2003, and thereafter are approximately
$339,000, $4,707,000, $5,655,000 $5,655,000, $5,655,000, and $37,275,000,
respectively. In August 1999, in connection with the lease agreement, the
Company entered into an irrevocable letter of credit with a commercial bank in
the amount of $4,500,000 as a security deposit payable to the landlord, the
amount of which is included in other assets for the period ended
September 30, 1999.
9. CONTINGENCY ACCRUAL AND OTHER MATTER
In January 1998, the Company became aware that Imageline, Inc. ("Imageline")
claimed to own the copyright in certain images that a third party, Sprint
Software Pty Ltd ("Sprint") had licensed to the Company. Some clip art images
that Imageline alleged infringed Imageline's copyright were included by the
Company in versions of the Company's Web Clip Empire product and licensed by the
Company to third parties, including other software clip publishers. The
Company's contracts with such publishers require the Company to indemnify the
publisher if copyrighted material licensed from the Company infringes a
copyright. Imageline claims that the Company's infringement of Imageline's
copyrights is ongoing. The Company and Imageline had
F-34
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
9. CONTINGENCY ACCRUAL AND OTHER MATTER (CONTINUED)
engaged in discussions, but were unable to reach any agreement regarding a
resolution of this matter.
On August 27, 1998, the Company filed a lawsuit in the United States
District Court for the Eastern District of Virginia against Imageline, certain
parties affiliated with Imageline, and Sprint regarding the Company's and its
licensees' alleged infringement on Imageline's copyright in certain clip art
that the Company licensed from Sprint. The lawsuit seeks, among other relief,
disclosure of information from Imageline concerning the alleged copyright
infringement, a declaratory judgment concerning the validity and enforceability
of Imageline's copyrights and copyright registrations, a declaratory judgment
regarding damages, if any, owed by the Company to Imageline, and indemnification
from Sprint for damages, if any, owed by the Company to Imageline. There is no
contractual limitation on Sprint's indemnification. While the Company is seeking
indemnification from Sprint for damages, if any, there can be no assurance that
Sprint will be able to fulfill the indemnity obligations under its license
agreements with the Company. In addition, the Company may be subject to claims
by third parties seeking indemnification from the Company in connection with the
alleged infringement of the Imageline copyrights.
On September 17, 1998, Imageline filed a counterclaim, which Imageline
amended in January 1999, seeking up to $60 million in damages. In March 1999,
the parties completed the discovery process and filed separate motions for
summary judgment.
On April 5, 1999, the Court granted one of the Company's motions for partial
summary judgment and stayed the case to allow Imageline to file all necessary
copyright registration applications to cover the clip art images.
Based on the discussions with Imageline, the Company believes the range of
liability related to this matter is from $0 up to $10,000,000; however, the
Company believes it is unlikely that the liability would exceed $1,000,000.
Accordingly, the Company reserved $1,000,000 for this potential liability, the
expense of which is included in non-recurring charges for the year ended
December 31, 1997. The Company believes that the $1,000,000 accrual represents a
reasonable estimate of the loss that could be incurred in the Imageline dispute.
Based on information available to date management does not believe that the
outcome of this matter will have a material effect on the Company's financial
position, results of operations and cash flows over and above the $1,000,000
accrued in the 1998 financial statements. If not successful in defending this
claim, the resulting outcome could have a material adverse impact on the
Company's business, results of operations, cash flows and financial condition in
a particular period.
Zoom Telephonics, Inc. filed a lawsuit against the Company in
September 1998 alleging trademark infringement and related statutory violations.
The Company was not served with Zoom Telephonics' complaint until January 1999.
Zoom Telephonics has demanded that the Company stop using the XOOM trademark and
has asked for an unspecified amount of money damages. The Company responded to
the complaint in February 1999. In April 1999, Zoom Telephonics filed a motion
for a preliminary injunction to stop the Company from using any mark containing
"Xoom.com"
In June 1999 the Company filed an opposition to Zoom Telephonics' motion for
preliminary injunction. A hearing on the motion was held on September 30, 1999.
On October 7, 1999 the court
F-35
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
9. CONTINGENCY ACCRUAL AND OTHER MATTER (CONTINUED)
denied Zoom Telephonics' motion for a preliminary injunction but allowed Zoom
Telephonics to request the court to reconsider the motion if the Xoom.com merger
does not close by October 31, 1999. On November 3, 1999, Zoom Telephonics filed
a motion to renew their previous motion for preliminary injunction. On November
17, 1999, the Company filed an opposition to Zoom Telephonics' motion to renew
its previous motion for a preliminary injunction. Although the Company believes
that Zoom's claims are without merit, such litigation could have a material
adverse effect on the Company's business, results of operations and financial
condition, particularly if such litigation forces the Company to make
substantial changes to its name and trademark usage.
On October 4, 1999, John G. Balletto ("Balletto") filed a lawsuit against
Xoom.com in September 1999 in the San Francisco Superior Court alleging breach
of contract and specific performance. Balletto has alleged that in connection
with a loan which Xoom.com obtained from Sand Hill Capital LLC in 1998 and
pursuant to an oral contract with Xoom.com, Balletto is entitled to a finder's
fee. Balletto has sought specific performance of the alleged oral agreement by
having the court direct Xoom.com to issue 33,784 shares of Common Stock to
Balletto and such other relief that the Court may deem just and proper. Xoom.com
believes that this lawsuit is without merit and intends to defend the suit
vigorously. Xoom.com does not believe that the outcome of this matter will
materially adversely impact its results of operations, cash flows, or financial
position. However, depending on the amount and timing, an unfavorable resolution
could have a material adverse effect on Xoom.com's results of operations,
financial position or cash flows in a particular period.
10. STOCKHOLDERS' EQUITY
In October 1998, the Company's Board of Directors authorized an increase in
the number of authorized shares of common stock and preferred stock from
20,000,000 to 40,000,000 and 1,000,000 to 5,000,000, respectively, each with a
par value of $.0001 per share.
On December 9, 1998, the Company completed its Initial Public Offering and
issued 4,600,000 shares (including 600,000 shares issued in connection with the
exercise of the underwriter over-allotment option) of its common stock to the
public at a price of $14.00 per share. The Company received net proceeds of
$57,341,000.
On April 9, 1999, the Company completed a secondary public offering of its
common stock and issued 4,600,000 shares (including 600,000 shares issued in
connection with the exercise of the underwriter over-allotment option) at a
price of $66.00 per share. Of the 4,600,000 shares of common stock sold in the
offering, 2,659,800 were sold by the Company and 1,940,200 shares were sold by
existing stockholders. The Company received net proceeds from the offering of
approximately $167 million.
COMMON STOCK
In May 1999, the Board of Directors voted to increase the number of
authorized shares to 80,000,000.
F-36
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
FOUNDERS STOCK
Pursuant to a Common Stock Purchase Agreement dated August 26, 1996 and
following the incorporation of the Company, two of the Company's founders each
purchased 333,334 shares (666,668 shares in total) of the Company's common stock
for an aggregate of $200 in cash. Pursuant to a Common Stock Purchase Agreement
dated December 31, 1996, the founders purchased an additional 2,333,334 and
1,000,000 shares, respectively, of the Company's common stock in exchange for
the cancellation of promissory notes that the Company owed to the
stockholders/founders in the amount of $700,000 and $300,000, respectively. In
the same agreement, one of the founders contributed 666,667 shares of his common
stock back to the Company without compensation pursuant to an agreement between
the founders.
STOCK SPLITS
In February 1998, the Company completed a one-for-two reverse stock split of
the outstanding shares of common stock. In addition, in November 1998, the
Company completed a two-for-three reverse stock split of the outstanding shares
of common stock. All share information and per share amounts in the accompanying
consolidated financial statements has been retroactively adjusted to reflect the
effect of these stock splits.
PREFERRED STOCK
The Company is authorized to issue 5,000,000 shares of preferred stock, none
of which is issued or outstanding. The Board of Directors has the authority to
issue the preferred stock in one or more series and to fix the designations,
powers, preferences, rights, qualifications, limitations and restrictions with
respect to any series of preferred stock and to specify the number of shares of
any series of preferred stock without any further vote or action by the
stockholders.
INVESTMENT FROM NATIONAL BROADCASTING COMPANY, INC.
On July 29, 1999, the Company issued 960,028 shares to National Broadcasting
Company, Inc. for $57.29 per share in connection with a Stock Purchase Agreement
dated June 11, 1999. The Company received proceeds of $55.0 million. The Stock
Purchase Agreement is filed on Form 8-K with the Securities and Exchange
Commission.
WARRANTS
In connection with the issuance of common stock during the year ended
December 31, 1998, the Company issued warrants to purchase a total of 314,747
shares of common stock at an exercise price of $3.33 per share. These warrants
were exercised prior to the Company's initial public offering on December 9,
1998. In November 1998, in connection with the loan agreement mentioned in
Note 6, the Company issued a warrant to the lender to purchase 183,333 shares of
the Company's common stock at an exercise price equal to the initial public
offering price per share ($14.00). On January 11, 1999, the lender exercised the
warrant in a net exercise transaction and received 116,231 shares of the
Company's common stock.
F-37
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
On September 13, 1999, Xoom.com entered into a strategic alliance with
Snap! LLC and ValueVision International, Inc. whereby the parties entered into
re-branding and electronic commerce agreements, including television home
shopping, Internet shopping and direct e-commerce initiatives. Under the terms
of the agreements, Snap granted ValueVision a ten-year, exclusive license to
Snap's "SnapTV" trademark for the purpose of operating a television home
shopping service and a Web site at www.snaptv.com. ValueVision International
Inc.'s television home shopping network, currently called ValueVision, will be
re-branded as SnapTV. Xoom.com will become the direct electronic commerce
partner for SnapTV, managing the customer database, e-mail marketing and other
sales efforts. Direct online shopping offers will include Xoom.com products and
services, as well as SnapTV merchandise. ValueVision and Xoom.com will share
revenues from all such initiatives. As part of the agreements, ValueVision and
Xoom.com entered into a warrant purchase agreement whereby Xoom.com agreed to
purchase a warrant for 404,760 shares of ValueVision common stock at an exercise
price of $24.71 per share, and ValueVision agreed to purchase a warrant for
244,004 shares of Xoom.com common stock at an exercise price of $40.89 per
share. The fair value of the warrant the Company received from ValueVision was
deemed to be $6.3 million, and the fair value of the warrant the Company granted
to ValueVision was deemed to be $6.9 million. The value of the warrant received
by Xoom.com was recorded as a long-term investment. The value of the warrant
granted by the Company was recorded as an addition to stockholders' equity. The
difference in value was recorded as a deferred charge, which will be charged to
sales and marketing expense over the warrant's estimated life. The warrants may
be exercised after the closing of the proposed NBCi merger agreement until
September 12, 2004. These rights and obligations of Xoom.com and Snap will be
assigned to and assumed by NBC Internet, Inc. following consummation of the
transactions contemplated in the merger agreement.
NOTES RECEIVABLE FROM STOCKHOLDERS
On June 16, 1999, in connection with its acquisition of MightyMail Networks,
Inc., the Company assumed stock subscriptions receivable from related parties in
exchange for shares of common stock. As of September 30, 1999, outstanding
subscriptions receivable amounted to approximately $995,000. All amounts mature
by April 2002.
STOCK OPTION PLAN
On November 16, 1998, the Company's Board of Directors and stockholders
approved an increase in the number of shares authorized under its 1998 stock
incentive plan (the "Plan") from 1,166,667 to 2,000,000. The Plan provides for
incentive stock options, as defined by the Internal Revenue Code, to be granted
to employees, at an exercise price not less than 100% of the fair value at the
grant date as determined by the Board of Directors. The Plan also provides for
nonqualified stock options to be issued to non-employee officers, directors and
consultants at an exercise price of not less than 85% of the fair value at the
grant date. Option vesting schedules are determined by the Board of Directors at
the time of issuance. Stock options generally vest over different periods
ranging from immediately to 25% at the end of the first year and monthly
thereafter up to a maximum of four years. Upon a change of control of the
Company, as defined in the Plan,
F-38
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
75% of unvested options become immediately exercisable. Certain options' vesting
can also accelerate based on the achievement of specified performance criteria.
A summary of the option activity follows (amounts include 1,235,224 options
granted outside of the Plan, all of which were outstanding as of December 31,
1998):
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance at April 16, 1996....................... -- $ --
Granted....................................... 440,000 0.03
Exercised..................................... -- --
Canceled...................................... -- --
--------- -----
Balance at December 31, 1996.................... 440,000 0.03
Granted....................................... 632,982 0.05
Exercised..................................... -- --
Canceled...................................... (95,000) 0.03
--------- -----
Balance at December 31, 1997.................... 977,982 0.05
Granted....................................... 1,957,225 9.35
Exercised..................................... -- --
Canceled...................................... (136,832) 4.05
--------- -----
Balance at December 31, 1998.................... 2,798,375 $6.20
========= =====
</TABLE>
As of December 31, 1998, there were 436,849 options available for future
grant under the Plan.
The following table summarizes information about options outstanding and
exercisable at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------- OPTIONS
WEIGHTED EXERCISABLE
AVERAGE -----------
REMAINING WEIGHTED- WEIGHTED-
CONTRACTUAL AVERAGE AVERAGE
NUMBER OF LIFE EXERCISE NUMBER EXERCISE
EXERCISE PRICE SHARES (IN YEARS) PRICE OF SHARES PRICE
- -------------- --------- ------------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
$ 0.03--$0.03........ 1,013,890 8.3 $ 0.03 721,547 $ 0.03
$ 0.90--$3.33........ 518,548 9.3 2.88 134,118 2.99
$ 6.30--$10.80....... 315,986 9.6 8.29 62,069 8.58
$12.00--$14.00....... 949,951 9.9 13.91 15,962 12.86
--------- -------
2,798,375 9.2 933,696
========= =======
</TABLE>
DEFERRED COMPENSATION
The Company has recorded deferred compensation charges of $0, $551,000 and
$2,017,000, for the period April 16, 1996 (inception) through December 31, 1996,
and for the years ended December 31, 1997 and 1998, respectively, for the
difference between the exercise price and the deemed fair value of certain stock
options granted by the Company. These amounts are being
F-39
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
amortized by charges to operations, using the accelerated method, over the
vesting periods of the individual stock options, which range from three months
to four years.
From December 1996 through June 1998, certain options were granted to
various employees which provided vesting only upon certain events, such as the
Company's successful completion of an initial public offering or individual and
Company performance goals. In June 1998 these options were modified to vest upon
the earlier of an event or two years from the date of grant. As a result, the
related compensation charge was determined in June 1998.
OPTIONS ISSUED TO CONSULTANTS
The Company granted options to purchase 94,883 shares of common stock to
consultants at exercise prices ranging from $0.03 to $14.00 per share during the
period from January 1, 1997 through December 31, 1998. These options were
granted in exchange for consulting services performed. The Company valued these
options using the estimated fair value of the services performed which amounted
to $0, $20,000 and $246,000, for the period from April 16, 1996 (inception)
through December 31, 1996, and for the years ended December 31, 1997 and 1998,
respectively. These amounts are being amortized by charges to operations over
the respective consulting periods. The amounts charged to operations were $0,
$17,000 and $238,000, for the period from April 16, 1996 (inception) through
December 31, 1996, and for the years ended December 31, 1997 and 1998,
respectively.
1998 EMPLOYEE STOCK PURCHASE PLAN
The Company's 1998 Employee Stock Purchase Plan was adopted by the Board of
Directors in October 1998. The Company has reserved a total of 300,000 shares of
common stock for issuance under the plan. Eligible employees may designate up to
100% of their compensation subject to certain limitations as described in the
Plan, to be deducted each pay period for the purchase of common stock at 85% of
the lesser of the fair market value of the Company's common stock on the first
day of the applicable purchasing period or the last day of the applicable
accrual period. As of December 31, 1998, no shares were issued or committed to
under this plan.
The Company's Plan was terminated by the Board of Directors in May 1999.
SHARES RESERVED FOR FUTURE ISSUANCE
As of December 31, 1998, shares of common stock reserved for future issuance
were as follows:
<TABLE>
<S> <C>
1998 stock incentive plan and options issued outside the
Plan........................................................ 3,235,224
1998 Employee Stock Purchase Plan........................... 300,000
Warrants.................................................... 183,333
---------
Total shares authorized for issuance.................. 3,718,557
=========
</TABLE>
F-40
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
PRO FORMA DISCLOSURE OF THE EFFECT OF STOCK-BASED COMPENSATION
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Pro forma information regarding net income (loss) and net income
(loss) per share is required by FAS 123. This information is required to be
determined as if the Company has accounted for its employee stock options under
the fair value method of FAS 123. Under this method, the estimated fair value of
the options is amortized to expense over the options' vesting period. The fair
value for these options was estimated at the date of grant using a Black-Scholes
option pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 16, 1996 YEARS ENDED
(INCEPTION) THROUGH DECEMBER 31,
DECEMBER 31, -------------------
1996 1997 1998
------------------- -------- --------
<S> <C> <C> <C>
Risk-free interest rate................. 6.5% 6.5% 4.52%
Expected life of the option in years.... 5 5 5
Expected volatility..................... 0 0 0.7
Expected dividend yield................. 0% 0% 0%
</TABLE>
Because FAS 123 is applicable only to options granted since inception, its
adjusted effect will not be fully reflected until the year 2000.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The weighted-average fair value of options granted to employees during the
period from April 16, 1996 (inception) through December 31, 1996, and during the
years ended December 31, 1997 and 1998, were $.02, $0.36 and $8.01,
respectively.
F-41
<PAGE>
XOOM.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
The effect of applying the FAS 123 fair value method to the Company's
stock-based awards results in net loss and net loss per share as follows:
<TABLE>
<CAPTION>
FOR THE PERIOD
APRIL 16, 1996 YEARS ENDED
(INCEPTION) THROUGH DECEMBER 31,
DECEMBER 31, -------------------
IN THOUSANDS, EXCEPT PER SHARE DATA 1996 1997 1998
- ----------------------------------- ------------------- -------- --------
<S> <C> <C> <C>
Net loss, as reported.................. $ (439) $(3,132) $(10,798)
Net loss, pro forma.................... $ (442) $(3,231) $(11,367)
Net loss per share--basic and diluted,
as reported.......................... $(0.89) $ (0.64) $ (1.37)
Net loss per share--basic and diluted,
pro forma............................ $(0.91) $ (0.66) $ (1.44)
</TABLE>
11. RETIREMENT PLAN
On March 26, 1998, the Company established a 401(k) Profit Sharing Plan (the
"Plan") available to all employees who meet the Plan's eligibility requirements.
Employees may elect to contribute from 1% to 25% of their eligible earnings to
the Plan subject to certain limitations. This defined contribution plan provides
that the Company may, at its discretion, make contributions to the Plan on a
periodic basis. The Company has not made contributions to the Plan.
F-42
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Managers
Snap! LLC:
We have audited the accompanying balance sheets of Snap! LLC as of December
31, 1997 and 1998, and the related statements of operations, members' deficit,
and cash flows for each of the years in the two-year period ended December 31,
1998. These financial statements are the responsibility of Snap! LLC's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Snap! LLC as of December 31,
1997 and 1998, and the results of its operations and its cash flows for each of
the years in the two-year period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ KPMG LLP
San Francisco, California
June 18, 1999
F-43
<PAGE>
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
BALANCE SHEET
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- --------------
<S> <C> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents............................... $ -- 865 542
Accounts receivable, net of allowance for doubtful
accounts of $0 at December 31 1997, $469 at December
31, 1998, and $993 at September 30, 1999.............. 367 3,015 3,926
Due from CNET........................................... -- 655 --
Prepaid expenses and other current assets............... -- 1,778 4,838
-------- -------- --------
Total current assets.................................. 367 6,313 9,306
Property and equipment, net............................... 1,127 4,674 10,225
Investments............................................... -- 605 32,607
Deposits and other assets................................. 36 42 2,502
-------- -------- --------
Total assets.......................................... $ 1,530 11,634 54,640
======== ======== ========
LIABILITIES AND MEMBERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................ $ 312 2,721 5,450
Accrued and other liabilities........................... 216 2,846 5,249
Deferred revenue........................................ 400 553 4,569
Due to CNET............................................. -- -- 1,788
Due to NBC.............................................. -- -- 101
-------- -------- --------
Total current liabilities............................. 928 6,120 17,157
Line of credit............................................ -- 13,500 43,300
-------- -------- --------
Total liabilities..................................... 928 19,620 60,457
-------- -------- --------
Commitments
Members' equity:
Members' equity......................................... 16,170 48,972 94,358
Deferred compensation................................... -- (2,102) (7,705)
Other accumulated comprehensive income.................. -- -- 22,731
Accumulated deficit..................................... (15,568) (54,856) (115,201)
-------- -------- --------
Total members' equity (deficit)....................... 602 (7,986) (5,817)
-------- -------- --------
Total liabilities and members' equity (deficit)....... $ 1,530 11,634 54,640
======== ======== ========
</TABLE>
See accompanying notes to financial statements.
F-44
<PAGE>
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- ---------------------
1997 1998 1998 1999
-------- -------- --------- ---------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Net revenues...................................... $ 817 7,317 3,310 23,000
Cost of net revenues.............................. 1,520 7,626 5,613 6,878
-------- ------- ------- -------
Gross profit (deficit)........................ (703) (309) (2,303) 16,122
Operating expenses:
Product development............................. 9,403 6,263 4,231 8,410
Sales and marketing............................. 4,090 12,482 6,110 20,976
General and administrative...................... 1,372 5,939 3,108 9,799
Amortization of deferred compensation........... -- 160 -- 3,207
Promotion and advertising provided by NBC....... -- 14,060 3,484 32,950
-------- ------- ------- -------
Total operating expenses...................... 14,865 38,904 16,933 75,342
-------- ------- ------- -------
Operating loss................................ (15,568) (39,213) (19,236) (59,220)
Other (expense) income, net....................... -- (75) 36 (1,125)
-------- ------- ------- -------
Net loss...................................... $(15,568) (39,288) (19,200) (60,345)
======== ======= ======= =======
Other comprehensive income:
Unrealized gains on available-for-sale
securities.................................. $ -- -- -- 22,731
-------- ------- ------- -------
Comprehensive net loss............................ $(15,568) (39,288) (19,200) (37,614)
======== ======= ======= =======
Basic and diluted net loss per unit............... $ (1.33) (2.95) (1.49) (2.60)
======== ======= ======= =======
Units used in per unit calculation................ 11,700 13,301 12,920 14,494
======== ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE>
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' EQUITY (DEFICIT)
(IN THOUSANDS)
<TABLE>
<CAPTION>
OTHER
MEMBER UNITS DEFERRED ACCUMULATED TOTAL
------------------- COMPENSATION COMPREHENSIVE ACCUMULATED MEMBERS'
UNITS AMOUNT EXPENSE INCOME DEFICIT EQUITY (DEFICIT)
-------- -------- ------------ ------------- ----------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Contributed capital from CNET,
Inc......................... 11,700 16,170 -- -- -- 16,170
Net loss...................... -- -- -- -- (15,568) (15,568)
------ ------- ------ ------ -------- -------
Balances as of December 31,
1997........................ 11,700 16,170 -- -- (15,568) 602
Contributed capital from CNET,
Inc......................... -- 10,616 -- -- -- 10,616
Cash contribution from NBC.... 2,744 5,864 -- -- -- 5,864
Promotion and advertising
provided by NBC............. -- 14,060 -- -- -- 14,060
Grant of compensatory stock
options..................... -- 2,262 (2,262) -- -- --
Amortization of deferred
compensation................ -- -- 160 -- -- 160
Net loss...................... -- -- -- -- (39,288) (39,288)
------ ------- ------ ------ -------- -------
Balances as of December 31,
1998........................ 14,444 $48,972 (2,102) -- (54,856) (7,986)
Promotion and advertising
provided by NBC
(unaudited)................. -- 32,950 -- -- -- 32,950
Grant of compensatory stock
options (unaudited)......... -- 8,810 (8,810) -- -- --
Issuance of units in
connection with GlobalBrain
transaction (unaudited)..... 75 2,989 -- -- -- 2,989
Unrealized gain on
available-for-sale
securities (unaudited)...... -- -- -- 22,731 -- 22,731
Amortization of deferred
compensation (unaudited).... -- -- 3,207 -- -- 3,207
Contributed capital from NBC
and CNET, Inc (unaudited)... -- 637 -- -- -- 637
Net loss (unaudited).......... -- -- -- -- (60,345) (60,345)
------ ------- ------ ------ -------- -------
Balances as of September 30,
1999 (unaudited)............ 14,519 $94,358 (7,705) 22,731 (115,201) (5,817)
====== ======= ====== ====== ======== =======
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE>
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -----------------------
1997 1998 1998 1999
-------- -------- ---------- ----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net loss............................................... $(15,568) (39,288) (19,200) (60,345)
Adjustments to reconcile net loss to net cash used in
operating activities:
Receipt of stock in exchange for services provided... -- (605) -- (7,268)
Depreciation and amortization........................ 329 929 469 2,456
Amortization of deferred compensation expense........ -- 160 -- 3,207
Promotion and advertising provided by NBC............ -- 14,060 3,484 32,950
Legal indemnification by members..................... -- -- -- 637
Changes in operating assets and liabilities:
Accounts receivable................................ (367) (2,648) (1,454) (911)
Prepaid expenses, deposits and other assets........ (36) (1,784) (1,768) (2,239)
Accounts payable................................... 312 2,409 1,465 2,729
Accrued and other liabilities...................... 216 2,630 1,227 2,403
Deferred revenue................................... 400 153 231 4,016
Due to/(from) CNET................................. -- (655) 756 2,443
Due to NBC......................................... -- -- -- 101
-------- ------- ------- -------
Net cash used in operating activities............ (14,714) (24,639) (14,790) (19,821)
-------- ------- ------- -------
Cash flows used in investing activities:
Cash paid in connection with Global Brain
transaction.......................................... -- -- (1,300)
Investment in Net2Phone................................ -- -- (228) (1,000)
Purchases of fixed assets.............................. (1,456) (4,476) (2,983) (8,002)
-------- ------- ------- -------
Net cash used in investing activities............ (1,456) (4,476) (3,211) (10,302)
-------- ------- ------- -------
Cash flows from financing activities:
Proceeds from line of credit........................... -- 13,500 2,300 29,800
Capital contribution................................... 16,170 10,616 10,527 --
Cash contribution from NBC............................. -- 5,864 5,864 --
-------- ------- ------- -------
Net cash provided by financing activities........ 16,170 29,980 18,691 29,800
-------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents..... -- 865 690 (323)
Cash and cash equivalents at beginning of the period..... -- -- -- 865
-------- ------- ------- -------
Cash and cash equivalents at end of the period........... $ -- 865 690 542
======== ======= ======= =======
Supplemental non-cash transactions:
Cash paid for interest................................. $ -- 13 -- 645
======== ======= ======= =======
Supplemental non-cash investing and financing activities:
Promotion and advertising provided by NBC.............. $ -- 14,060 3,484 32,950
======== ======= ======= =======
Issuance of member units in connection with Global
Brain transaction.................................... $ -- -- -- 2,989
======== ======= ======= =======
Grant of compensatory stock options.................... $ -- 2,262 -- 8,810
======== ======= ======= =======
Unrealized gain on available-for-sale securities....... $ -- -- -- 22,731
======== ======= ======= =======
Services rendered in exchange for equity investments... $ -- 605 -- 7,268
======== ======= ======= =======
Legal indemnification by members....................... $ -- -- -- 637
======== ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE>
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(1) ORGANIZATION AND BASIS OF PRESENTATION
(A) THE COMPANY
Snap! LLC (Snap or the Company) commenced operations in December 1996 (the
Company had no significant operating results during 1996) and was introduced as
a service in September 1997. Snap is an Internet portal service company that
offers a branded network of comprehensive information, media, ecommerce,
communication, and navigation services to millions of users daily.
The Company was incorporated on June 25, 1998 as a Delaware limited
liability company (LLC). Prior to that date, the Company was operated as a
wholly-owned and consolidated operation of CNET, Inc. (CNET). The accompanying
financial statements retroactively reflect the incorporation of the Company as
an LLC to the date of the inception of the Company's operations. On or about
June 30, 1998, as part of a contribution agreement entered into between CNET and
NBC, Inc. (NBC) (collectively, the Members), CNET contributed its assets and
liabilities used exclusively in the operation of the Snap service to the LLC for
an approximately 81% ownership interest, while NBC contributed approximately
$5.9 million in cash to the LLC for an approximately 19% ownership interest (see
Note 7). CNET's and NBC's contributions were recorded at their respective
historical carrying amounts.
The accompanying financial statements and related notes also reflect the
historical results of operations and cash flows of Snap while it was operated by
CNET. The statement of operations includes all revenues and costs directly
attributable to Snap, including costs for facilities, functions and services
used by the business and allocations of costs for certain administrative
functions and services performed by centralized departments of CNET. Costs have
been allocated to the Snap operation based on CNET management's estimate of
costs attributable to the Snap operation. Such costs are not necessarily
indicative of the costs that would have been incurred if Snap had been a
separate entity.
(B) LIQUIDITY
The Company has sustained losses and negative cash flows from operations
since inception and expects these conditions to continue into the foreseeable
future. As of September 30, 1999, the Company had accumulated losses from
inception of approximately $115 million. The implementation of the Company's
business plan is dependent upon obtaining additional equity or debt financing
through public or private financing, strategic partnerships or other
arrangements. There can be no assurance that such additional financing will be
available on terms attractive to the Company, or at all. Should additional
external financing not be available, management would curtail the Company's
current growth plans to enable the Company to continue operations through 1999.
(C) XOOM.COM/NBC/SNAP MERGER
On May 9, 1999, the Company, Xoom.com, Inc., NBC, Inc. and certain of its
affiliates (collectively, NBC), and CNET, Inc. entered into a series of
definitive agreements, (the Agreements) relating to the formation of a new
company to be named NBC Internet, Inc. (NBCi) upon
F-48
<PAGE>
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(1) ORGANIZATION AND BASIS OF PRESENTATION (CONTINUED)
consummation of all the transactions contemplated by the Agreements. NBCi is
expected to include the businesses of the Company, Xoom.com, Inc., and certain
of NBC's Internet assets (including NBC.com, Videoseeker.com and NBC Interactive
Neighborhood) and a 10% interest in CNBC.com.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) REVENUE RECOGNITION
The Company's revenues are derived principally from the sale of banner
advertisements and sponsorships. Advertising revenues are recognized in the
period which the advertisement is displayed, provided that no significant
obligations remain at the end of the period. Company obligations typically
include the guarantee of a minimum number of "impressions" or times that an
advertisement appears in pages viewed by users of the Company's online
properties. To the extent the minimum guaranteed impressions are not delivered,
the Company defers recognition of the corresponding revenue until the remaining
guaranteed impression levels are achieved.
The Company also earns revenue on sponsorship contracts from fees relating
to the design, coordination, and integration of customers' content and links
into Snap's online media properties. Such developmental fees are recognized as
revenue once the related activities have been performed and the customers' Web
links are available on Snap's online properties. Snap also derives revenues from
development fees and electronic commerce which to date have each comprised less
than 10% of revenues.
Deferred revenue is primarily comprised of billings in excess of recognized
revenue relating to advertising contracts and payments received pursuant to
sponsorship agreements in advance of revenue recognition.
(B) PRODUCT DEVELOPMENT
Development expenses include expenses which were incurred in the development
of new or improved technologies that enhance the performance of the Company's
Internet service. Costs for development are expensed as incurred. Costs related
to specific products or services are no longer recognized as development
expenses when the specific product or service is launched and incorporated into
the Company's internet service.
(C) ADVERTISING COSTS
All advertising costs are expensed when incurred. Advertising expense,
including the value of advertising provided through barter transactions, totaled
approximately $1,007,000, $18,559,000, $5,408,000 and $36,066,000 for the years
ended December 31, 1997 and 1998, and the nine months ended September 30, 1998
and 1999, respectively. These costs include the value of promotion and
advertising provided by NBC (see Note 7).
F-49
<PAGE>
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) CONCENTRATIONS OF CUSTOMERS AND CREDIT RISK
One customer comprised 8% and 26% of net revenues for the year ended
December 31, 1998 and the nine-months ended September 30, 1999, respectively, in
conjunction with non-monetary transactions in which the Company received equity
as consideration for services sold by the Company. One separate customer
accounted for 18% of net revenues for the year ended December 31, 1997. During
the years ended December 31, 1997 and 1998, and the nine months ended September
30, 1998 and 1999 no other customer accounted for greater than 10% of revenues.
During the quarter ended June 30, 1999, the Company received stock in a
private company currently valued at approximately $10 million in exchange for
future services of equivalent value to be rendered by the Company. Subsequent to
the fiscal quarter end, the Company and the private company issuer of the stock
completed an escrow arrangement under which the Company would earn the release
of the shares from escrow. The release of the shares from escrow would be based
on the Company's actual monthly performance during a two-year term. As of
September 30, 1999, the Company had earned the release of shares valued at
approximately $1,350,000, which has been recorded as revenue in the nine months
then ended.
No other significant revenues were recorded on non-monetary transactions in
which the Company received equity investments as consideration for services.
Financial instruments which potentially expose the Company to a
concentration of credit risk consists primarily of trade accounts receivable.
Accounts receivable are typically unsecured and are derived from revenues earned
from customers primarily in the United States. The Company performs ongoing
credit evaluations of its customers and maintains reserves for potential credit
losses. At December 31, 1998 and September 30, 1999, no one customer accounted
for more than 10% of the accounts receivable balance.
(E) CASH, CASH EQUIVALENTS, AND INVESTMENTS
The Company considers investments in highly liquid instruments purchased
with remaining maturities of 90 days or less to be cash equivalents. Cash
equivalents are recorded at cost which approximates fair value. The Company
maintains its cash in two depository accounts with high credit quality financial
institutions.
Equity investments in private companies are recorded initially at fair value
when the Company's rights of ownership vest, and subsequently are carried at the
lower of cost or net realizable value. Equity investments in publicly traded
companies are initially recorded at market value when the Company's rights of
ownership vest and are assumed to be available-for-sale securities which are
carried at market value, with changes in market value recorded as unrealized
gains and losses in total member's equity.
F-50
<PAGE>
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method over the
estimated useful lives of the assets, generally three to seven years. Property
and equipment recorded under leasehold improvements are amortized on a
straight-line basis over the shorter of the lease terms or their estimated
useful lives.
(G) INCOME TAXES
Prior to June 25, 1998 the Company's taxable losses were included in the
consolidated tax returns of CNET, Inc. The Company did not receive any benefit
from CNET Inc.'s receipt of such operating losses or research and development
credits.
Upon the incorporation as a Delaware limited liability company on June 26,
1998, the Company's net operating losses inured to the benefit of the Members.
Accordingly, no provision for income taxes is recognized in the accompanying
financial statements as the net loss generated from the Company's operations was
"passed through" to the Members.
(H) SOFTWARE DEVELOPMENT COSTS
Statement of Financial Accounting Standard (SFAS) No. 86, ACCOUNTING FOR THE
COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED OR OTHERWISE MARKETED, governs
accounting for software development costs. This statement provides for
capitalization of certain software development costs once technological
feasibility has been established. The costs capitalized are then amortized on a
straight-line basis over the estimated product life, or on the ratio of current
revenue to total projected product revenues, whichever is greater. No such costs
have been capitalized to date.
(I) STOCK-BASED COMPENSATION
The Company accounts for its stock-based employee compensation plans using
the intrinsic value method. As such, compensation expense is recorded on the
date of grant if the current market price of the underlying membership unit
exceeded the exercise price.
(J) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. Actual results could differ from those estimates.
(K) COMPREHENSIVE LOSS
The Company has adopted the provisions of SFAS No. 130, REPORTING
COMPREHENSIVE INCOME, which established standards for reporting and disclosures
of comprehensive results and
F-51
<PAGE>
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
its components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. During the first nine months of 1999 the Company
reported unrealized holding gains arising from investments classified as
available-for-sale. The Company has an investment in Mail.com, Inc., which
completed an initial public offering during the second quarter of 1999 and an
investment in Net2Phone, Inc. which completed an initial public offering during
the third quarter of 1999. The Company's investments were recorded at market
value based on the closing price of the stock on September 30, 1999, and the
increase in value of the stock was recorded as an unrealized holding gain in
comprehensive loss.
(L) BARTER TRANSACTIONS
The Company trades advertisements on its online properties in exchange for
advertisements on the online properties of other companies. These revenues and
marketing expenses are recorded at the fair value of services provided or the
fair value of the services received, whichever is more reliably determinable in
the circumstances. Revenue from barter transactions is recognized as income when
advertisements are delivered on the Company's online properties. Expense from
barter transactions is recognized when advertisements are provided to the
Company. Barter revenues and expenses were approximately $342,000, $636,000,
$541,000 and $1,591,000 for the years ended December 31, 1997 and 1998 and for
the nine months ended September 30, 1998 and 1999, respectively.
(M) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's cash and cash equivalents, accounts
receivable, equity investments, accounts payable and long-term debt approximate
their respective fair values.
(N) IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF
The Company reviews its long-lived assets and certain identifiable
intangibles whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such assets
are considered to be impaired, the impairment to be recognized is measured as
the amount by which the carrying amount of the assets exceeds the fair value of
the assets. Assets to be disposed of are reported at the lower of the carrying
amount or fair value less costs to sell.
(O) RECENT ACCOUNTING PRONOUNCEMENTS
The FASB recently issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as derivatives), and for
hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those
F-52
<PAGE>
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
instruments at fair value. For a derivative not designated as a hedging
instrument, changes in the fair value of the derivative are recognized in
earnings in the period of change. The Company must adopt SFAS No. 133 by January
1, 2001. Management does not believe the adoption of SFAS No. 133 will have a
material effect on the financial position or operations of the Company.
(P) NET LOSS PER UNIT
Basic and diluted loss per unit is computed using the weighted average
number of outstanding units at the end of each period. The following potentially
dilutive units have been excluded from the determination of net loss per unit
for all periods because the effect of such units would have been anti-dilutive:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Units issuable under unit option plan............ 986,662 2,904,832
Units issuable under option to NBC (see Note
7)............................................. 14,805,556 14,805,556
---------- ----------
15,792,218 17,710,388
========== ==========
</TABLE>
As of December 31, 1998 and September 30, 1999, the weighted average
exercise price of unit options was $2.47 and $23.19, respectively.
(Q) INTERIM FINANCIAL DATA
The accompanying financial statements as of September 30, 1999 and for the
nine months ended September 30, 1998 and 1999, are unaudited. In the opinion of
management, these interim statements have been prepared on the same basis as the
audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the results
of the interim periods. The financial data disclosed in these notes to the
financial statements for these periods are also unaudited. The results of
operations for the interim periods are not necessarily indicative of the results
to be expected for any future periods.
(3) GLOBALBRAIN INVESTMENT
In April 1999, the Company entered into a series of agreements with
GlobalBrain.net, Inc. (GlobalBrain). In aggregate, the Company committed to
provide GlobalBrain with $2 million in cash and 75,000 membership units (valued
at $3 million) in exchange for (i) a seven-year (with an option to extend an
additional five years) exclusive right to utilize certain GlobalBrain technology
(the Technology) within a portal service, (ii) non-exclusive rights to utilize
the Technology in other Snap products and to sublicense the Technology, (iii) a
commitment from GlobalBrain to provide a minimum of five dedicated GlobalBrain
engineers working full time under the discretion of Snap on custom research and
development work for three years, (iv) a 10% ownership interest in GlobalBrain,
and (v) warrants to purchase an additional 41% of GlobalBrain in three separate
F-53
<PAGE>
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(3) GLOBALBRAIN INVESTMENT (CONTINUED)
tranches over a five year period. The Company accounted for this transaction as
the acquisition of certain tangible and intangible assets, and allocations of
the consideration surrendered by the Company were made to the following:
purchased technology of approximately $2 million, prepaid development fees of
approximately $2 million, and an equity investment in a private company of
approximately $1 million.
(4) PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- -------------
<S> <C> <C> <C>
Furniture, fixtures, leasehold improvements
and equipment............................... $ 102 1,763 2,024
Purchased software............................ 159 242 1,277
Computer equipment............................ 1,195 3,927 10,633
------ ----- ------
1,456 5,932 13,934
Less accumulated depreciation and
amortization................................ 329 1,258 3,709
------ ----- ------
$1,127 4,674 10,255
====== ===== ======
</TABLE>
(5) CREDIT FACILITIES AND COMMITMENTS
(A) LINE OF CREDIT
As of December 31, 1998, the Company has a revolving line of credit for
$27,000,000 which is secured by substantially all of the Company's assets,
guaranteed by General Electric, parent company of the Company's principal
shareholders, and bears interest at various rates which ranged from 5.40% to
6.86% during the year ended December 31, 1998. Extensions of credit are
available until June 15, 2001. Advances made under the facility shall mature no
later than July 15, 2001. At December 31, 1998, $13,500,000 was outstanding and
$10,170,000 was available under the line of credit. The outstanding balance is
comprised of multiple individual borrowings, which are due between April 6, 1999
and June 28, 1999. The borrowings are classified as long-term on the face of the
balance sheet because the Company has the ability and intent to extend the due
dates beyond December 31, 1999. The due dates on these borrowings have been
extended to between October 1, 1999 and December 7, 1999, respectively.
On September 14, 1999, the Company's revolving line of credit, guaranteed by
General Electric, was increased to $55,000,000. At September 30, 1999,
$43,300,000 was outstanding and $7,820,000 was available under the line of
credit. The outstanding balance is comprised of multiple individual borrowings,
due between October 1, 1999, and December 7, 1999, and bear interest at various
rates ranging from 5.22% to 8.25%. These borrowings are classified as long-term
on the
F-54
<PAGE>
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(5) CREDIT FACILITIES AND COMMITMENTS (CONTINUED)
face of the balance sheet because the Company has the ability and intent to
extend the due dates beyond twelve months.
In both periods, a total of $3,330,000 of the line of credit was reserved in
accordance with the requirements of the Company's facilities lease.
(B) COMMITMENTS
The Company is obligated under a noncancelable operating lease for office
space, expiring in 2008. Rent expense was $200,000, $1,923,000, $1,235,000, and
$2,205,000 for the years ended December 31, 1997 and 1998, and for the nine
months ended September 30, 1998 and 1999, respectively. The Company subleases
portions of its facilities under noncancelable operating sublease agreements
which expire over the next three years. Rental income from these subleases was
$0, $360,000, $250,000, and $618,000 for the years ended December 31, 1997 and
1998, and for the nine months ended September 30, 1998 and 1999, respectively.
The Company has no capital lease obligations.
As of December 31, 1998, future minimum lease payments for the Company's
operating leases are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31:
- ------------------------
<S> <C>
1999...................................................... $ 2,540
2000...................................................... 2,540
2001...................................................... 2,540
2002...................................................... 2,540
2003...................................................... 2,926
Thereafter................................................ 11,503
-------
$24,589
=======
</TABLE>
The minimum operating lease payments have not been reduced by any future
minimum sublease rentals totalling $1,614,000 due under noncancelable subleases
over the next three years.
F-55
<PAGE>
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(6) OPTION PLAN
A summary of the Company's option activity and related information through
September 30, 1999 follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
UNITS PRICES
--------- ------------
<S> <C> <C>
Options outstanding, December 31, 1997............ -- $ --
Granted........................................... 1,012,572 7.79
Canceled.......................................... (25,910) 7.79
--------- -----
Options outstanding, December 31, 1998............ 986,662 7.79
Granted (unaudited)............................... 1,976,432 30.94
Canceled (unaudited).............................. (58,262) 25.23
--------- -----
Options outstanding, September 30, 1999
(unaudited)..................................... 2,904,832 23.19
========= =====
Options exercisable, December 31, 1998............ 31,107 7.79
Options exercisable, September 30, 1999
(unaudited)..................................... 217,891 11.02
========= =====
</TABLE>
The following summarizes information about options outstanding as of
September 30, 1999:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
RANGE OF NUMBER OF REMAINING WEIGHTED AVERAGE
EXERCISE PRICES UNITS CONTRACTUAL LIFE (YRS.) EXERCISE PRICE
--------------------- --------- ----------------------- ----------------
<S> <C> <C> <C>
$ 7.79 - $ 7.79 1,103,695 8.80 $ 7.79
30.$19 - $41.00.... 1,626,210 9.79 $30.84
42.$00 - $59.81.... 174,927 9.80 $49.17
--------- ---- ------
7.7$9 - $59.81..... 2,904,832 9.41 $23.19
========= ==== ======
</TABLE>
As of December 31, 1998 and September 30, 1999, options available for grant
under the Company's option plan totaled 618,276 and 345,168, respectively.
For the year ended December 31, 1998 and the nine months ended September 30,
1999, the Company recorded $2,262,000 and $8,810,000 respectively, of deferred
compensation charges representing the difference between the deemed fair value
of the membership unit on the date of grant and the option exercise price on the
date of grant. Deferred compensation will be amortized over the four-year
vesting period of the options using an accelerated method. During the year ended
December 31, 1998 and the nine months ended September 30, 1999, $160,000 and
$3,207,000 of amortization of deferred compensation was recognized as expense.
F-56
<PAGE>
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(6) OPTION PLAN (CONTINUED)
If compensation cost for the Company's option plan had been determined based
on the fair value at the grant date for awards issued in the year ending
December 31, 1998, consistent with the provisions of SFAS No. 123 ACCOUNTING FOR
STOCK-BASED COMPENSATION, then the Company's net loss would have been increased
to the pro forma amounts indicated below (in thousands):
<TABLE>
<S> <C>
Net loss--as reported....................................... $ 39,288
Net loss--pro forma......................................... $ 39,646
</TABLE>
The weighted average fair value at date of grant for options granted for the
year ending December 31, 1998 was $3.88. The fair value of each option grant was
estimated on the date of grant using the minimum value option pricing model with
the following assumptions:
<TABLE>
<S> <C>
Risk free interest rate..................................... 6%
Weighted-average expected life of the options............... 4 years
Dividend rate............................................... --
</TABLE>
(7) RELATED PARTY TRANSACTIONS
Prior to June 30, 1998, all of the expenditures of the Company were incurred
by CNET and charged to the Company. These expenditures included allocations for
accounting, legal, network operations, facilities, certain product development
efforts, and other general expenses. Such allocations were generally allocated
to the Company based on headcount, estimates on the percentage usage by the
Company, or estimates of the time spent by CNET employees on the
F-57
<PAGE>
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(7) RELATED PARTY TRANSACTIONS (CONTINUED)
business of the company. The following table summarizes direct and indirect
expenses of the Company prior to June 30, 1998 (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 1, 1998
1997 TO JUNE 30, 1998
-------- ----------------
<S> <C> <C>
COST OF NET REVENUES
Direct expenses paid by CNET on behalf of the Company....... $1,055 3,066
Expenses allocated by CNET to the Company................... 465 868
------ -----
1,520 3,934
====== =====
PRODUCT DEVELOPMENT
Direct expenses paid by CNET on behalf of the Company....... $8,471 884
Expenses allocated by CNET to the Company................... 932 1,418
------ -----
9,403 2,302
====== =====
SALES AND MARKETING
Direct expenses paid by CNET on behalf of the Company....... $1,806 1,862
Expenses allocated by CNET to the Company................... 2,284 1,507
------ -----
4,090 3,369
====== =====
GENERAL AND ADMINISTRATIVE
Direct expenses paid by CNET on behalf of the Company....... $ 73 133
Expenses allocated by CNET to the Company................... 1,299 1,274
------ -----
1,372 1,407
====== =====
</TABLE>
Such allocations are not necessarily indicative of the costs that would have
been incurred if the Company had been a separate entity. However, management
believes the differences between the allocated costs and the cost to obtain such
services from an outside third party would not be significant.
Following June 30, 1998, the Company began direct procurement and payment of
all of its expenses, with the exception of certain services it contracted with
CNET to provide or maintain. Such services include creative services, human
resources, accounting, facilities, technology support, bandwidth and hosting
support, and sales and marketing, and the Company recorded expenses totaling
$3.7 million and $3.2 million for the year ended December 31, 1998 and for the
nine months ended September 30, 1999, respectively, for amounts due to CNET for
such services.
NBC has provided certain promotional and other services to the Company since
its investment date. NBC has provided advertising and promotion services to the
Company which have been recorded as capital contributions at the time the
services were provided based on the average CPM value for commercial air time
during the period the services were provided. The Company has recorded
advertising and promotion expenses of approximately $14.1 million and $33.0
million for the year ended December 31, 1998 and the nine months ended September
30, 1999, respectively,
F-58
<PAGE>
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(7) RELATED PARTY TRANSACTIONS (CONTINUED)
at the average CPM value for commercial air time during the period the services
were provided. NBC is not committed to provide such services to the Company. NBC
has provided other services to the Company related to advertising production and
legal support and the Company has recorded expenses totaling $0.2 million and
$1.6 million for the year ended December 31, 1998 and for the nine months ended
September 30, 1999, respectively, for amounts due to NBC for such services.
During the years ended December 31, 1997 and 1998 and the nine months ended
September 30, 1998 and 1999, the Company has recorded no significant revenues
from CNET, General Electric, NBC or any of their affiliates.
The Company's credit facility is guaranteed by General Electric, parent
company of NBC (see Note 5).
As defined in the contribution agreement, NBC has an option to purchase
14,805,556 membership units for an aggregate price of $31,365,802. The option
expires in June, 2001.
(8) DEFINED CONTRIBUTION PLAN
The Company has a defined contribution plan pursuant to Section 401(k) of
the Internal Revenue Code covering all eligible employees. Under the plan,
participating employees may defer a portion of their pretax earnings up to the
Internal Revenue Service annual contribution limit. For the year ended
December 31, 1998, the Company did not contribute to the plan.
(9) SEGMENT INFORMATION
The Company has adopted the provisions of SFAS No. 131, DISCLOSURE ABOUT
SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. SFAS No. 131 establishes
standards for the reporting by public business enterprises of information about
operating segments, products and services, geographic areas and major customers.
The method for determining what information to report is based on the way that
management organizes the operating segments within the Company for making
operating decisions and assessing financial performance.
The Company's chief operating decision maker is considered to be the
Company's Chief Executive Officer ("CEO"). The information reviewed by the CEO
for purposes of making operating decisions and assessing financial performance
is identical to the information presented in the accompanying financial
statement of operations. The Company operates in one segment, Internet
operations. The Company has had no international revenues to date.
(10) LEGAL PROCEEDINGS
The Company was involved in a dispute with Snap Technologies, Inc. (Snap
Tech) which claimed to own the Snap trademark. Snap Tech filed a lawsuit against
CNET on November 19, 1998, alleging trademark infringement and related statutory
violations, to which the Company filed an answer on November 24, 1998. On July
15, 1999, the lawsuit with Snap Tech was settled.
F-59
<PAGE>
SNAP! LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(10) LEGAL PROCEEDINGS (CONTINUED)
Pursuant to the settlement agreement, the Company shall pay $200,000, grant an
advertising credit of $1,000,000, and provide certain other promotions to Snap
Tech in exchange for all worldwide rights to all names, trademarks, and service
marks previously used by Snap Tech. NBC and CNET will indemnify the Company for
this legal settlement. Accordingly, the amounts paid by NBC and CNET have been
included in the accompanying financial statements as contributed capital.
In March 1999 the Company filed a complaint against CityAuction, Inc. in
connection with an agreement entered into between the Company and CityAuction to
promote CityAuction's online auction site in exchange for monetary compensation
and warrants to purchase shares of CityAuction. The Company is claiming that
CityAuction breached the agreement by refusing to honor the Company's exercise
in February 1999 of its CityAuction warrants, failing to make a $125,000 payment
due to the Company and failing to provide the Company with notice of
CityAuction's pending acquisition by Ticketmaster Online-CitySearch, Inc. The
Company is also claiming that Ticketmaster induced CityAuction to breach it
contractual obligations to the Company. This matter is in the discovery stage.
An unfavorable outcome in this litigation would deny the Company the economic
benefit of the claimed payments and stock ownership of CityAuction. No amounts
contingent upon a favorable outcome in this litigation have been recorded in the
Company's financial statements.
F-60
<PAGE>
NBC MULTIMEDIA DIVISION
INDEPENDENT AUDITORS' REPORT
The Board of Directors
National Broadcasting Company, Inc.
We have audited the accompanying combined balance sheets of NBC Multimedia
Division as of December 31, 1997 and 1998, and the related combined statements
of operations and changes in parent company's investment and net advances and
cash flows for the years then ended. These combined financial statements are the
responsibility of NBC Multimedia Division's management. Our responsibility is to
express an opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of NBC Multimedia
Division as of December 31, 1997 and 1998, and the results of its operations and
its cash flows for the years then ended in conformity with generally accepted
accounting principles.
/s/ KPMG LLP
New York, New York
June 24, 1999
F-61
<PAGE>
NBC MULTIMEDIA DIVISION
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------ -------------
1997 1998 1999
---------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Trade accounts receivable, less allowance for
doubtful accounts of $59,000 in 1997, $125,440 in
1998 and $161,000 in 1999........................ $1,348,082 2,274,240 536,357
Other receivables.................................. 56,848 11,852 34,944
---------- ----------- -----------
Total current assets............................. 1,404,930 2,286,092 571,301
Property and equipment, net of accumulated
depreciation of $243,501 in 1997, $339,570 in 1998,
and $408,984 in 1999............................... 916,513 622,561 447,389
---------- ----------- -----------
Total assets..................................... $2,321,443 2,908,653 1,018,690
========== =========== ===========
LIABILITIES AND PARENT COMPANY'S INVESTMENT
AND NET ADVANCES
Current liabilities:
Accounts payable................................... $ 637,044 1,464,743 1,750,601
Accrued expenses and liabilities (note 2).......... 418,227 414,402 239,501
---------- ----------- -----------
Total current liabilities........................ 1,055,271 1,879,145 1,990,102
Deferred revenue (note 1(d))......................... 1,695,637 14,639,258 17,878,162
Parent Company's investment and net advances......... (429,465) (13,609,750) (18,849,574)
Commitments and contingencies (note 5)
---------- ----------- -----------
Total liabilities and Parent Company's investment
and net advances............................... $2,321,443 2,908,653 1,018,690
========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-62
<PAGE>
NBC MULTIMEDIA DIVISION
COMBINED STATEMENTS OF OPERATIONS AND CHANGES IN
PARENT COMPANY'S INVESTMENT AND NET ADVANCES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenue (note 1(d)):
Advertising, sponsorship, and license
fees................................ $ 3,232,384 6,921,250 3,563,449 5,891,755
Other revenue......................... -- 4,693,300 3,365,197 6,598,175
----------- ----------- ----------- -----------
Total revenue....................... 3,232,384 11,614,550 6,928,646 12,489,930
Cost of revenue......................... 4,398,846 5,248,928 3,512,590 4,573,624
----------- ----------- ----------- -----------
Gross (loss) profit................. (1,166,462) 6,365,622 3,416,056 7,916,306
Operating expenses:
Operating and development........... 677,055 938,295 775,117 390,691
Sales and marketing................. 2,355,519 3,988,810 2,862,153 1,042,224
General and administrative.......... 3,540,408 4,488,756 3,723,533 2,098,784
----------- ----------- ----------- -----------
Total operating expenses............ 6,572,982 9,415,861 7,360,803 3,531,699
----------- ----------- ----------- -----------
(Loss) income from operations....... (7,739,444) (3,050,239) (3,944,747) 4,384,607
----------- ----------- ----------- -----------
Net (loss) income................... (7,739,444) (3,050,239) (3,944,747) 4,384,607
Parent Company's investment and net
advances, beginning of period......... 428,008 (429,465) (429,465) (13,609,750)
Advances from (distributions to) Parent
Company, net.......................... 6,881,971 (10,130,046) (11,477,710) (9,624,431)
----------- ----------- ----------- -----------
Parent Company's investment and net
advances, end of period............... $ (429,465) (13,609,750) (15,851,922) (18,849,574)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to combined financial statements.
F-63
<PAGE>
NBC MULTIMEDIA DIVISION
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------------------
1997 1998 1998 1999
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income..................... $(7,739,444) (3,050,239) (3,944,747) 4,384,607
Adjustments to reconcile net (loss)
income to net cash used in operating
activities:
Provision for doubtful accounts..... 59,000 66,440 52,980 35,560
Depreciation and amortization....... 156,995 176,287 129,489 105,694
Loss on disposal of property and
equipment......................... 109,840 220,576 220,576 109
Noncash revenue related to partner
agreements (note 1(d))............ (33,305) (5,101,895) (3,324,470) (8,644,073)
Advertising provided by NBC -- 2,015,400 1,395,500 --
Changes in operating assets and
liabilities:
Accounts receivable................... (1,335,482) (992,598) (577,465) 1,702,323
Other receivables..................... 541,604 44,996 34,003 (23,092)
Accounts payable...................... (465,351) 827,699 1,060,493 285,858
Accrued expenses and liabilities...... 247,054 (3,825) (65,266) (174,901)
Deferred revenue...................... 1,462,499 (67,085) 75,142 (537,082)
----------- ----------- ----------- -----------
Net cash used in operating
activities...................... (6,996,590) (5,864,244) (4,943,765) (2,864,997)
----------- ----------- ----------- -----------
Cash flows from investing activities:
Acquisition of property and
equipment........................... (151,823) (102,911) (98,621) --
----------- ----------- ----------- -----------
Cash flows from financing activities:
Advances received from parent, net.... 7,148,413 5,967,155 5,042,386 2,864,997
----------- ----------- ----------- -----------
Net change in cash and cash
equivalents..................... -- -- -- --
Cash and cash equivalents at beginning
of period............................. -- -- -- --
----------- ----------- ----------- -----------
Cash and cash equivalents at end of
period................................ -- -- -- --
=========== =========== =========== ===========
Summary of noncash transactions:
Equity instruments received and
transferred to parent (note 4)...... 266,442 18,112,601 17,915,595 12,420,060
</TABLE>
See accompanying notes to combined financial statements.
F-64
<PAGE>
NBC MULTIMEDIA DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
(A) SUMMARY OF OPERATIONS
The accompanying combined financial statements include the assets and
operations of NBC.com, NBC Interactive Neighborhood (NBC-IN) and VideoSeeker
(collectively, the Division), all of which are operating divisions of NBC
Multimedia, Inc., a wholly owned subsidiary of National Broadcasting Company,
Inc. (NBC), which is a wholly owned subsidiary of General Electric Company (GE).
NBC has agreed to merge the operations and certain defined net assets of the
NBC.com and NBC-IN divisions with Xoom.com, Inc. (Xoom.com), under an agreement
dated May 9, 1999 and amended on June 11, 1999, which also provides that NBC
will contribute its ownership interests in Snap! LLC to the merged entity, NBC
Internet, Inc. (NBCi). Upon completion of these transactions, NBC will own
approximately 48.5% of the common stock of NBCi. In addition, NBC will purchase
from NBCi zero coupon convertible subordinated debentures due 2006 with an
aggregate principal amount at maturity of approximately $487 million in exchange
for the net assets of VideoSeeker and a note payable in the amount of $340
million. The aforementioned transactions were consummated on November 30, 1999.
The principal activities of the Division are as follows:
NBC.com, launched in August 1995, is the Internet venue for the NBC
television network offering content about NBC on-air programming, providing show
descriptions, episode updates, actor biographies, schedule information and
program trivia for NBC entertainment programming. NBC.com also maintains direct
links to NBC's news, finance and sports sources, MSNBC News, CNBC, and MSNBC
Sports, as well as links to local news and weather through NBC's local station
affiliates via NBC-IN.
NBC-IN, launched in October 1997, is a Web-based network of local news and
information sites developed with certain participating NBC owned and affiliated
television stations throughout the United States. Through NBC-IN.com, Internet
users can access local news, sports and weather as well as services such as job
search, local advertising for real estate and automobiles, restaurant reviews
and telephone directories.
VideoSeeker, launched in May 1998, is a full-service video aggregator,
licensing content from NBC's media properties as well as from third parties to
offer users free online access to topical and archival news video from MSNBC,
clips from NBC television programming, movie trailers, music video and
interviews.
The Division generates revenues primarily through advertising, sponsorship
and licensing agreements.
(B) BASIS OF PRESENTATION
The accompanying combined financial statements include certain corporate
general and administrative expenses incurred on a consolidated basis by NBC for
all periods presented that have been allocated to the Division. Such allocations
are included in general and administrative
F-65
<PAGE>
NBC MULTIMEDIA DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
expenses in the Division's combined statements of operations and changes in
parent company's investment and net advances. In management's opinion, the basis
for the allocation of such costs is reasonable and is based upon the ratio of
the total direct operating costs incurred by the Division to total NBC direct
operating costs. However, the expenses allocated to the Division, although made
on a basis management believes to be reasonable, may not necessarily be
representative of what the Division would have incurred on a stand-alone basis.
Allocated costs are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ---------------------
1997 1998 1998 1999
----------- ---------- --------- ---------
<S> <C> <C> <C> <C>
NBC Corporate................................. $ 913,000 1,059,000 794,250 700,056
Rent.......................................... 684,209 851,833 652,374 757,798
---------- --------- --------- ---------
$1,597,209 1,910,833 1,446,624 1,457,854
========== ========= ========= =========
</TABLE>
NBC corporate overhead expenses consist primarily of senior management
salaries and benefits, financial, legal, information technology, and other
administrative costs.
(C) USE OF ESTIMATES
The preparation of financial statements in accordance with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the combined
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
(D) REVENUE RECOGNITION
The Division derives revenue from the sale of banner advertisements under
short-term contracts. To date, the duration of the Division's advertising
commitments has generally averaged from one to six months. Advertising revenues
are recognized ratably in the period in which the advertisement is displayed,
provided that no significant Division obligations remain and collection of the
resulting receivable is probable. Division obligations typically include the
guarantee of a minimum number of "impressions" or times that an advertisement
appears in pages viewed by the users of the Division's Web sites. To the extent
minimum guaranteed impressions are not met, the Division defers recognition of
the corresponding revenue until the remaining guaranteed impression levels are
achieved.
The Division (primarily through NBC-IN) also derives revenues from license
fees from various service providers who pay a fee to furnish content, e-commerce
or services in a particular category of the Division's Web sites. These fees are
deferred and recognized ratably over the term of the related agreement, which is
generally two to three years.
F-66
<PAGE>
NBC MULTIMEDIA DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Division also earns revenue on sponsorship contracts for fees relating
to the design, coordination and integration of the customer's contents and links
to the Division's Web sites. These development fees are recognized as revenue
once the related activities have been performed. Revenues from electronic
commerce revenue sharing arrangements within the Division's Web sites are
recognized upon notification from its partners of sales attributable to the
Division's site, and were insignificant in all periods presented.
The Division receives equity instruments (common or preferred stock, options
and warrants) under certain agreements with service providers and under certain
outsourcing agreements. When the measurement date for such equity instruments is
fixed and there is a sufficient disincentive to breach the contract in
accordance with Emerging Issues Task Force Abstract No. 96-18, "Accounting for
Equity Instruments That are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services," the Division records the receipt
of the equity instruments and corresponding deferred revenue. When equity
instruments are contingent upon the achievement of certain targets, the Company
records the benefit of the equity instruments at the time the targets are
achieved at the then fair market value of the equity instrument. Such amounts
are amortized ratably to revenue over the length of the contract commencing on
the measurement date.
Such equity instruments are transferred to NBC and upon measurement are
charged to Parent company's investment and net advances. Changes in value
subsequent to the measurement date are not reflected in the Division's combined
financial statements.
Revenues recognized under agreements whereby the Division receives equity
instruments in the service provider's stock as described above, in consideration
for the advertising and customer acquisition opportunities, are recorded as
Advertising, sponsorship, and license fee revenue and aggregated $33,305,
$1,408,595, $709,273, and $2,795,898 in the years ended December 31, 1997, and
1998, and the nine months ended September 30, 1998 and 1999, respectively.
Revenue from the receipt of equity instruments in connection with
outsourcing agreements, recorded as Other revenue, aggregated $--0-, $3,693,300,
$2,615,197, and $5,848,175 in the years ended December 31, 1997 and 1998, and
the nine months ended September 30, 1998 and 1999, respectively.
(E) BARTER TRANSACTIONS
The Division trades advertisements on its Web properties in exchange for the
loan of computer equipment. Barter revenues and expenses are recorded at the
fair market value of services provided or received, whichever is more
determinable in the circumstances. Revenue from barter transactions is
recognized as income when advertisements are delivered on the Division's Web
sites. Barter expense is recognized over the period the equipment is in use,
which is typically in the same period when the barter revenue is recognized.
Advertising barter revenues and expenses were approximately $393,000, $77,000,
$74,500 and $--0- for the years ended December 31, 1997 and 1998, and the nine
months ended September 30, 1998 and 1999, respectively.
F-67
<PAGE>
NBC MULTIMEDIA DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the related assets,
generally five to seven years. Leasehold improvements are amortized using the
straight-line method over the estimated useful lives of the assets or the term
of the leases, whichever is shorter.
(G) INCOME TAXES
For all periods, the Division has been included in the consolidated federal,
state and local income tax returns of NBC. Income taxes are calculated and
provided for on a consolidated basis, and the Division has not been allocated
any income tax expense (benefit) by NBC. For purposes of these financial
statements, federal, state and local income taxes are provided as if the
Division had filed a separate return on a stand-alone basis for all periods
presented.
The Division accounts for income taxes using the asset and liability method.
Under this method, deferred tax assets and liabilities are recognized, to the
extent realizable, for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is recognized in
results of operations in the period that the tax change occurs. Such tax assets
and liabilities are not a part of the merger transaction. Accordingly, all
current and deferred tax assets and liabilities are included as part of Parent
Company's investment and net advances, and are not reflected in the combined
balance sheets of the Division.
(H) IMPAIRMENT OF LONG-LIVED ASSETS
The Division reviews its long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
(I) ADVERTISING EXPENSES
The Division expenses the cost of advertising and promoting its services as
incurred. Such costs are included in sales and marketing on the combined
statements of operations and totaled $425,166, $2,569,844, $1,869,398 and
$288,172 for the years ended December 31, 1997 and 1998 and the nine months
ended September 30, 1998 and 1999, respectively. These costs include the value
of advertising provided by NBC of $0, $2,015,400, $1,395,500, and $0 for the
years ended December 31, 1997 and 1998 and the nine months ended September 30,
1998 and 1999, respectively, which have been recorded based on average values
for commercial air time sold by NBC during the period the services were
provided.
F-68
<PAGE>
NBC MULTIMEDIA DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(J) PRODUCT DEVELOPMENT COSTS
Product development costs consist principally of salaries and related costs,
and are charged to expense as incurred.
(K) FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Division to significant
concentrations of credit risk consist of accounts receivable and accounts
payable. At December 31, 1997 and 1998, the fair value of these instruments
approximated their financial statement carrying amount because of the short-term
maturity of these instruments. The Division has not experienced any significant
credit loss to date. Revenue from the Division's five largest customers
accounted for approximately 53% and 27% of the Division's advertising,
sponsorship and license fee revenue for the years ended December 31, 1997 and
1998, respectively.
No single customer exceeded 10% of the Division's advertising, sponsorship
and license fee revenue for the year ended December 31, 1998. Two customers
accounted for 42% of the Division's accounts receivable at December 31, 1998.
Three customers exceeded 10% of revenue for the year ended December 31,
1997. Three customers accounted for approximately 74% of accounts receivable at
December 31, 1997.
(L) COMPREHENSIVE INCOME (LOSS)
There were no differences between the Division's comprehensive loss and its
net loss as reported.
(M) SEGMENT INFORMATION
The Division operates in a single segment in the United States.
(N) RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and for hedging activities. SFAS No. 133 is
effective for all fiscal quarters of fiscal years beginning after June 15, 2000.
The Division has not yet determined the impact of adopting SFAS No. 133.
(O) INTERIM RESULTS
The accompanying interim combined financial statements as of September 30,
1999 and for the nine months ended September, 1998 and 1999 are unaudited. In
the opinion of management, the unaudited interim financial statements have been
prepared on the same basis as the annual financial statements and reflect all
adjustments, which include only normal recurring adjustments, necessary to
present fairly the financial position as of September 30, 1999 and the results
of the Division's operations and its cash flows for the nine months ended
September 30, 1998 and 1999.
F-69
<PAGE>
NBC MULTIMEDIA DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(1) SUMMARY OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The financial data and other information disclosed in these notes to combined
financial statements related to these periods are unaudited. The results for the
nine months ended September 30, 1999 are not necessarily indicative of the
results to be expected for the year ending December 31, 1999.
(2) BALANCE SHEET COMPONENTS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- 1999
1997 1998 (UNAUDITED)
--------- -------- -------------
<S> <C> <C> <C>
PROPERTY AND EQUIPMENT, NET
Machinery and equipment................................ $ 955,184 762,458 656,700
Leasehold improvements................................. 204,830 199,673 199,673
--------- -------- --------
1,160,014 962,131 856,373
--------- -------- --------
Less accumulated depreciation and amortization (243,501) (339,570) (408,984)
--------- -------- --------
$ 916,513 622,561 447,389
========= ======== ========
Accrued Expenses and Liabilities
Accrued salaries, incentive compensation and related
benefits............................................. $ 381,802 414,402 239,501
Other.................................................. 36,425 -- --
--------- -------- --------
$ 418,227 414,402 239,501
========= ======== ========
</TABLE>
(3) INCOME TAXES
The Division has generated net losses for all periods through December 31,
1998, and has no net income tax expense in any period on a stand-alone basis.
Although no net deferred tax assets with respect to net operating loss benefits
would have been established due to uncertainty of utilization, net operating
loss benefits would have been available to offset net income in the six months
ended June 30, 1999 on a stand-alone basis. Other deferred tax assets
aggregating approximately $3.2 million and $5.2 million at December 31, 1997 and
1998, respectively, arising principally from temporary differences in the
recognition of revenue related to equity instruments also would have been offset
by a valuation allowance on a stand-alone basis.
(4) PARENT COMPANY'S INVESTMENT AND NET ADVANCES
Operations are funded through advances from NBC. Such advances have no
defined repayment terms.
During the years ended December 31, 1997 and 1998, and the nine months ended
September 30, 1998 and 1999, respectively, net advances were reduced by
$266,442, $18,112,601,
F-70
<PAGE>
NBC MULTIMEDIA DIVISION
NOTES TO COMBINED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997 AND 1998
(INFORMATION AS OF AND FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1998 AND 1999 IS UNAUDITED)
(4) PARENT COMPANY'S INVESTMENT AND NET ADVANCES (CONTINUED)
$17,915,595, and $12,420,060, representing the value of equity instruments
received under partner agreements by the Division and transferred to NBC.
(5) OUTSOURCING AGREEMENTS
In May 1998, the Division entered into a four year strategic alliance with
USWeb whereby USWeb would perform production and hosting services for the
Division's Web sites. The Division is committed to pay approximately $2.6
million per year for these services under the agreement. NBC has the right to
extend the agreement unilaterally for an additional four-year term at a fixed
increase in the annual fee. NBC may terminate the agreement with three months
prior written notice to USWeb. Beginning in November 1999, USWeb may terminate
the agreement with six months prior written notice to NBC. In connection with
the strategic alliance, USWeb issued warrants to the Division to purchase
1,600,000 and 500,000 shares of USWeb Common Stock at $22.14 and $25.03 per
share, respectively. If the agreement had been cancelled by the Division before
May 1999, USWeb could have cancelled the warrants to purchase 1,050,000 shares
or, if the warrants had been previously exercised, could have repurchased them.
In October 1997, NBC signed a two year strategic alliance agreement with
InterVU, Inc. ("InterVU") whereby InterVU is the exclusive provider, subject to
certain limitations, of technology and services for VideoSeeker. In exchange for
entering into the agreement, InterVU issued 1,280,000 shares of series G
preferred stock to the Division. In addition, InterVU agreed to pay the Division
$2 million in a series of non-refundable payments for promotional value and the
cost of producing and operating VideoSeeker, which is recognized as Other
revenue ratably over the two-year period.
In March 1999, NBC-IN entered into an exclusive three-year agreement under
which 24/7 Media, Inc. will sell advertising on participating NBC television
stations and their associated Web sites. As part of the agreement, 24/7 Media,
Inc. issued to the Division warrants to purchase up to 150,000 shares of 24/7
Media, Inc.'s common stock for $26.05 per share. These warrants vest and expire
on specified dates and in specified amounts between March 11, 1999 and March 11,
2002. The value of the warrants received is recorded on each vesting date at the
then fair market value and recognized as Other revenue ratably over the term of
the agreement.
These agreements are accounted for as described in note 1(d).
F-71
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Paralogic Corporation
We have audited the accompanying balance sheets of Paralogic Corporation as
of December 31, 1996 and 1997, and the related statements of operations,
shareholders' equity (deficit) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paralogic Corporation at
December 31, 1996 and 1997, and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Palo Alto, California
July 20, 1998
F-72
<PAGE>
PARALOGIC CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
<S> <C> <C>
1996 1997
-------- --------
ASSETS
Current assets:
Cash...................................................... $ 29,680 $ 26,910
Accounts receivable, net of allowance for doubtful
accounts of $375 in 1996 and $11,314 in 1997............ 10,946 24,362
Income taxes receivable................................... -- 836
-------- --------
Total current assets........................................ 40,626 52,108
Fixed assets, net........................................... 40,429 40,086
-------- --------
Total assets................................................ $ 81,055 $ 92,194
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................... $ 15,202 $ 27,719
Accrued compensation and related expenses................. 27,155 12,641
Income taxes payable...................................... 2,261 --
Deferred revenue.......................................... -- 64,210
Contingency accrual....................................... -- 164,802
Deferred income taxes..................................... 2,026 --
-------- --------
Total current liabilities................................... 46,644 269,372
-------- --------
Commitments and contingencies
Shareholders' equity (deficit):
Common stock, $1.00 par value:
Authorized shares--1,000,000;
Issued and outstanding shares--5,000 in 1996 and 5,250
in 1997............................................... 5,000 11,000
Retained earnings (accumulated deficit)................... 29,411 (188,178)
-------- --------
Total shareholders' equity (deficit)........................ 34,411 (177,178)
-------- --------
Total liabilities and shareholders' equity (deficit)........ $ 81,055 $ 92,194
======== ========
</TABLE>
See accompanying notes.
F-73
<PAGE>
PARALOGIC CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------------
<S> <C> <C>
1996 1997
-------- ---------
Net revenue:
Services.................................................. $132,569 $ 215,917
License fees.............................................. 39,074 --
Advertising............................................... 1,379 34,028
-------- ---------
Total net revenue........................................... 173,022 249,945
Cost of net revenue:
Cost of services.......................................... 80,019 117,963
-------- ---------
Gross profit................................................ 93,003 131,982
-------- ---------
Costs and expenses:
Operating and development................................. 38,529 45,875
Sales and marketing....................................... 26,129 86,097
General and administrative................................ 11,591 45,757
Contingency accrual....................................... -- 164,802
-------- ---------
Total costs and expenses.................................... 76,249 342,531
-------- ---------
Income (loss) before provision for income taxes............. 16,754 (210,549)
Provision for income taxes.................................. 3,666 7,040
-------- ---------
Net income (loss)........................................... $ 13,088 $(217,589)
======== =========
</TABLE>
See accompanying notes.
F-74
<PAGE>
PARALOGIC CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS
------------------- (ACCUMULATED
SHARES AMOUNT DEFICIT) TOTAL
-------- -------- ------------ ---------
<S> <C> <C> <C> <C>
Balances at December 31, 1995..................... 5,000 $ 5,000 $ 16,323 $ 21,323
Net income...................................... -- -- 13,088 13,088
----- ------- --------- ---------
Balances at December 31, 1996..................... 5,000 5,000 29,411 34,411
Issuance of common stock in exchange for
consulting services........................... 250 6,000 -- 6,000
Net loss........................................ -- -- (217,589) (217,589)
----- ------- --------- ---------
Balances at December 31, 1997..................... 5,250 $11,000 $(188,178) $(177,178)
===== ======= ========= =========
</TABLE>
See accompanying notes.
F-75
<PAGE>
PARALOGIC CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
<S> <C> <C>
1996 1997
-------- ----------
OPERATING ACTIVITIES:
Net income (loss)........................................... $ 13,088 $ (217,589)
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation.............................................. 11,794 29,321
Common stock issued in exchange for consulting services... -- 6,000
Changes in operating assets and liabilities:
Accounts receivable..................................... 7,379 (13,416)
Accounts payable........................................ 4,366 12,517
Accrued compensation and related expenses............... 10,265 (14,514)
Income tax payable/receivable........................... (238) (3,097)
Deferred revenue........................................ -- 64,210
Contingency accrual..................................... -- 164,802
Deferred income taxes................................... (1,115) (2,026)
-------- ----------
Net cash provided by operating activities................... 45,539 26,208
INVESTING ACTIVITIES:
Purchases of fixed assets................................... (42,066) (28,978)
-------- ----------
Net cash used in investing activities....................... (42,066) (28,978)
-------- ----------
Net change in cash.......................................... 3,473 (2,770)
Cash at beginning of year................................... 26,207 29,680
-------- ----------
Cash at end of year......................................... $ 29,680 $ 26,910
======== ==========
SUPPLEMENTAL DISCLOSURES:
Cash paid for income taxes.................................. $ 5,019 $ 10,812
======== ==========
</TABLE>
See accompanying notes.
F-76
<PAGE>
PARALOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Paralogic Corporation (the "Company"), was incorporated in the State of
California on January 12, 1995.
The Company is a provider of chat room software and various online services.
BASIS OF PRESENTATION
The Company has negative working capital and an accumulated deficit at
December 31, 1997. The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. On March 11, 1998,
the Company agreed to be acquired by Xoom.com, Inc.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported results of operations during the reporting period.
Actual results could differ from those estimates.
CASH
The Company maintains cash in depository accounts with two financial
institutions.
CONCENTRATIONS OF CREDIT RISK
The Company conducts business primarily with companies throughout the United
States. Management believes that any risk of accounting loss is mitigated by the
Company's ongoing credit evaluations of its customers. The Company generally
does not require collateral. The Company analyzes the need for reserves for
potential credit losses and records reserves when necessary.
For the year ended December 31, 1996, four customers accounted for $41,000,
$35,320, $29,625 and $28,000 or 24%, 20%, 17% and 16% of net revenue; of these,
one customer owed the Company $8,020 at December 31, 1996. There was no single
customer that accounted for more than 10% of net revenue for the year ended
December 31, 1997.
FIXED ASSETS
Fixed assets are recorded at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of three years.
REVENUE RECOGNITION
SERVICE
The majority of the Company's service revenue is from fees related to
fees charged for chat network hosting and are recognized when the services
are performed.
F-77
<PAGE>
PARALOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LICENSE FEES
The Company licenses software under non-cancelable license agreements to
end-users. License fee revenue is recognized when a non-cancelable license
agreement has been signed, the product has been delivered, there are no
uncertainties surrounding product acceptance, the fees are fixed and
determinable, collection is considered probable and all significant
contractual obligations have been satisfied.
ADVERTISING
Advertising revenues are derived from the sale of banner advertisements
under short-term contracts. Advertising revenue on banner contracts are
recognized ratably in the period in which the advertisement is displayed,
provided that no significant Company obligations remain and collection of
the resulting receivable is probable. Company obligations typically include
the guarantee of a minimum number of "impressions" or times that an
advertisement appears in pages viewed by the users of the Company's online
properties. To the extent minimum guaranteed impressions are not met, the
Company defers recognition of the corresponding revenue until the remaining
guaranteed impression levels are achieved.
ADVERTISING EXPENSE
All advertising costs are expensed when incurred. Advertising costs which
are included in sales and marketing expense for the years ended December 31,
1996 and 1997 were $0 and $9,377, respectively.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("FAS 109"), which requires the use of the liability method in accounting for
income taxes. Under FAS 109, deferred tax assets and liabilities are measured
based on differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement
No. 130, "Reporting Comprehensive Income" ("FAS 130"), and Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information"
("FAS 131"). The Company is required to adopt these statements in fiscal year
1998. FAS 130 establishes new standards for reporting and displaying
comprehensive income and its components. FAS 131 requires disclosure of certain
information regarding operating segments, products and services, geographic
areas of operation and major customers. Adoption of these statements is expected
to have no impact on the Company's consolidated financial position, results of
operations or cash flows.
F-78
<PAGE>
PARALOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
<S> <C> <C>
1996 1997
-------- --------
Computer equipment..................................... $ 49,122 $ 78,100
Office equipment....................................... 5,413 5,413
-------- --------
54,535 83,513
Accumulated depreciation............................... (14,106) (43,427)
-------- --------
$ 40,429 $ 40,086
======== ========
</TABLE>
3. INCOME TAXES
Significant components of the provision (benefit) for income taxes
attributable to operations are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
<S> <C> <C>
1996 1997
------- -------
Current:
Federal................................................ $ 2,770 $ 2,242
State.................................................. 2,011 1,824
Foreign................................................ -- 5,000
------- -------
4,781 9,066
Deferred:
Federal................................................ (368) (2,266)
State.................................................. (747) 240
------- -------
(1,115) (2,026)
------- -------
Total provision.......................................... $ 3,666 $ 7,040
======= =======
</TABLE>
F-79
<PAGE>
PARALOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INCOME TAXES (CONTINUED)
A reconciliation of income taxes at the statutory federal income tax rate to
net income taxes included in the accompanying statements of operations is as
follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-------------------
<S> <C> <C>
1996 1997
------- --------
U.S. federal taxes at statutory rate.................... $ 4,774 $(72,658)
Impact of graduated U.S. statutory rate................. (3,055) (2,098)
State taxes, net of federal benefit..................... 1,264 (12,261)
Foreign withholding taxes............................... -- 5,000
Foreign tax deduction................................... -- (1,700)
Valuation allowance..................................... -- 89,586
Other................................................... 683 1,171
------- --------
Total tax provision..................................... $ 3,666 $ 7,040
======= ========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial and tax
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
<S> <C> <C>
1996 1997
------- --------
Deferred tax assets:
Cash to accrual adjustment............................ $ 1,431 $ 97,518
Depreciation.......................................... (3,457) (7,932)
------- --------
Net deferred tax assets (liabilities)................... (2,026) 89,586
Valuation allowance..................................... -- (89,586)
------- --------
Total net deferred tax liabilities...................... $(2,026) $ --
======= ========
</TABLE>
The valuation allowance increased by $89,586 in 1997.
4. SHAREHOLDERS' EQUITY (DEFICIT)
The Company is authorized to issue 1,000,000 shares of common stock, with a
par value of $1.00 per share.
During 1997, the Company issued shares of common stock to consultants in
exchange for consulting services. The Company valued the common stock using the
estimated fair value of the services performed which amounted to $6,000. This
amount was amortized by charges to operations over the consulting period.
F-80
<PAGE>
PARALOGIC CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company has entered into certain operating leases for office space. At
December 31, 1997, the Company had no future commitments for noncancelable
operating leases.
The Company's rental expense under operating leases for the years ended
December 31, 1996 and 1997 totaled $300 and $3,900, respectively.
CONTINGENCY ACCRUAL
Due to the nature of its business, Paralogic Corporation is subject to
various threatened or filed legal actions. At December 31, 1997, there were
certain legal proceedings pending against the Company. These legal disputes were
settled in 1998 in connection with the business combination which is described
in Note 6. The settlement consisted of an issuance to the plaintiff of 71,343
shares of the acquiror's common stock, valued at approximately $164,802. This
settlement amount associated with this dispute was accrued for at December 31,
1997.
6. SUBSEQUENT EVENTS
In March 1998, the Company spun off certain components of the business into
a new company named Paralogic Software, Inc. ("PSI"). The shareholders of the
Company retained the same ownership privileges and rights in PSI as were in
effect for the Company at the time of the spin off. PSI retained the Company's
advertising and services businesses as well as the ownership of the Paralogic
chat technology. The Company retained a perpetual right to use and license the
Paralogic chat technology and all of the tangible assets and liabilities.
Effective March 11, 1998, the Company entered into a merger agreement with
Xoom.com, Inc. under which the outstanding shares of common stock of the Company
were exchanged for common shares of Xoom.com, Inc. and the right to receive
certain cash distributions from Xoom.com, Inc. The financial statements do not
include any adjustments to the recorded amounts of assets and liabilities which
may result from this transaction.
7. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company believes that it will not be required to modify or replace any
portion of its software so that its computer systems will function properly with
respect to dates in the year 2000 and thereafter.
F-81
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Global Bridges Technologies, Inc.
We have audited the accompanying balance sheets of Global Bridges
Technologies, Inc. as of December 31, 1996 and 1997, and the related statements
of operations, shareholders' deficit and cash flows for the period from
July 23, 1996 (inception) through December 31, 1996 and for the year ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Global Bridges Technologies,
Inc. at December 31, 1996 and 1997, and the results of its operations and its
cash flows for the period from July 23, 1996 (inception) through December 31,
1996 and for the year ended December 31, 1997, in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
July 10, 1998
F-82
<PAGE>
GLOBAL BRIDGES TECHNOLOGIES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- MARCH 31,
1996 1997 1998
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ -- $ 1,036 $ 230
Note receivable from shareholder.......................... 3,404 -- --
-------- -------- --------
Total current assets........................................ 3,404 1,036 230
Deposits.................................................... 712 712 712
-------- -------- --------
Total assets................................................ $ 4,116 $ 1,748 $ 942
======== ======== ========
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current liabilities:
Accounts payable and accrued expenses..................... $ 19,466 $ 47,557 $ 46,131
Note payable to shareholder............................... -- 2,446 13,746
-------- -------- --------
Total current liabilities................................... 19,466 50,003 59,877
Commitments
Shareholders' deficit:
Preferred stock, no par value:
Authorized shares--10,000,000
Issued and outstanding shares--none in 1996, 1997 or
1998.................................................. -- -- --
Common stock, no par value:
Authorized shares--10,000,000
Issued and outstanding shares--630,000, 500,000 and
500,000
in 1996, 1997 and 1998, respectively................ 5,000 5,000 5,000
Accumulated deficit....................................... (20,350) (53,255) (63,935)
-------- -------- --------
Total shareholders' deficit................................. (15,350) (48,255) (58,935)
-------- -------- --------
Total liabilities and shareholders' deficit................. $ 4,116 $ 1,748 $ 942
======== ======== ========
</TABLE>
See accompanying notes.
F-83
<PAGE>
GLOBAL BRIDGES TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 23, 1996
(INCEPTION) THREE MONTHS ENDED
THROUGH YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -------------------------
1996 1997 1997 1998
------------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Net revenue................................ $ 49,153 $ 27,937 $ 8,500 $ --
Cost of net revenue........................ 38,885 23,718 7,302 --
-------- -------- -------- --------
Gross profit............................... 10,268 4,219 1,198 --
Costs and expenses:
Operating and development................ 3,457 19,300 4,634 6,595
Sales and marketing...................... 5,991 3,841 2,836 --
General and administrative............... 18,716 13,983 5,826 4,085
-------- -------- -------- --------
Total costs and expenses................... 28,164 37,124 13,296 10,680
-------- -------- -------- --------
Loss before provision for income taxes..... (17,896) (32,905) (12,098) (10,680)
Provision for income taxes................. 2,454 -- -- --
-------- -------- -------- --------
Net loss................................... $(20,350) $(32,905) $(12,098) $(10,680)
======== ======== ======== ========
</TABLE>
See accompanying notes.
F-84
<PAGE>
GLOBAL BRIDGES TECHNOLOGIES, INC.
STATEMENTS OF SHAREHOLDERS' DEFICIT
FOR THE PERIOD FROM JULY 23, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
AND THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
COMMON STOCK
------------------- ACCUMULATED
SHARES AMOUNT DEFICIT TOTAL
-------- -------- ----------- --------
<S> <C> <C> <C> <C>
Issuance of common stock at inception to
founders....................................... 630,000 $5,000 $ -- $ 5,000
Net loss......................................... -- -- (20,350) (20,350)
-------- ------ -------- --------
Balances at December 31, 1996...................... 630,000 5,000 (20,350) (15,350)
Repurchase of common stock in September 1997 in
exchange for future royalties.................. (130,000) -- -- --
Net loss......................................... -- -- (32,905) (32,905)
-------- ------ -------- --------
Balances at December 31, 1997...................... 500,000 5,000 (53,255) (48,255)
Net loss (unaudited)............................. -- -- (10,680) (10,680)
-------- ------ -------- --------
Balances at March 31, 1998 (unaudited)............. 500,000 $5,000 $(63,935) $(58,935)
======== ====== ======== ========
</TABLE>
See accompanying notes.
F-85
<PAGE>
GLOBAL BRIDGES TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
JULY 23, 1996
(INCEPTION) THREE MONTHS ENDED
THROUGH YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, -------------------------
1996 1997 1997 1998
------------- ------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss................................... $(20,350) $(32,905) $(12,098) $(10,680)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Deposits................................. (712) -- -- --
Accounts payable and accrued expenses.... 19,466 28,091 17,512 (1,426)
-------- -------- -------- --------
Net cash provided by (used in) operating
activities............................... (1,596) (4,814) 5,414 (12,106)
INVESTING ACTIVITIES:
Cash advanced to shareholder in exchange
for note receivable...................... (3,404) -- -- --
Payment received from shareholder.......... -- 3,404 -- --
-------- -------- -------- --------
Net cash provided by (used in) investing
activities............................... (3,404) 3,404 -- --
FINANCING ACTIVITIES:
Capital contributed by founders............ 5,000 -- -- --
Proceeds from note payable to
shareholder.............................. -- 2,446 -- 11,300
-------- -------- -------- --------
Net cash provided by financing
activities............................... 5,000 2,446 -- 11,300
-------- -------- -------- --------
Net change in cash......................... -- 1,036 5,414 (806)
Cash at beginning of period................ -- -- -- 1,036
-------- -------- -------- --------
Cash at end of period...................... $ -- $ 1,036 $ 5,414 $ 230
======== ======== ======== ========
SUPPLEMENTAL DISCLOSURES:
Cash paid for income taxes................. $ -- $ -- $ 2,454 $ --
======== ======== ======== ========
</TABLE>
See accompanying notes.
F-86
<PAGE>
GLOBAL BRIDGES TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JULY 23, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
AND THE YEAR ENDED DECEMBER 31, 1997
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Global Bridges Technologies, Inc. (the "Company"), formerly known as Dream
Fabrications and Design, Inc., was incorporated in California on July 23, 1996.
The Company designs, develops and markets games, educational, and on-line
titles on behalf of publishers and developers. It also hosts and operates its
subscribers' branded web-based e-mail service using Sitemail, a web-based e-mail
solution which enables the integration of computer software for use in the field
of Internet based e-mail, advertising and commerce, and intranet based content
distribution.
BASIS OF PRESENTATION
The Company began operations on July 23, 1996 and has incurred operating
losses through December 31, 1997. On June 11, 1998, the Company sold all of its
stock to Xoom.com, Inc.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported results of operations during the reporting period. Actual results
could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim financial information as of March 31, 1998 and for the three
months ended March 31, 1997 and 1998 is unaudited but has been prepared on the
same basis as the audited financial statements and includes all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of its financial position at such date and its
results of operations and cash flows for those periods. Operating results for
the three months ended March 31, 1998 are not necessarily indicative of results
that may be expected for any future periods.
CASH
The Company maintains its cash in depository accounts with one financial
institution.
CONCENTRATIONS OF CREDIT RISK
The Company conducts business primarily with companies in various industries
throughout the United States. The Company generally does not require collateral.
F-87
<PAGE>
GLOBAL BRIDGES TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JULY 23, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
AND THE YEAR ENDED DECEMBER 31, 1997
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes" ("FAS 109"), which requires the use of the liability method in accounting
for income taxes. Under FAS 109, deferred tax assets and liabilities are
measured using enacted rates and laws that will be in effect when the
differences are expected to reverse.
REVENUE RECOGNITION
The Company generally recognizes revenue from consulting services as such
services are performed and when collection is determined to be probable.
ADVERTISING EXPENSE
All advertising costs are expensed when incurred. Advertising costs, which
are included in sales and marketing expense, for the period from July 23, 1996
(inception) through December 31, 1996 and the year ended December 31, 1997 were
$205 and $397, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998 the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income" ("FAS 130") which
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. The adoption
of this standard had no impact on the Company's financial position,
shareholders' deficit, results of operations or cash flows.
2. NOTE RECEIVABLE FROM AND PAYABLE TO SHAREHOLDER
At December 31, 1996 the note receivable from shareholder represents cash
advances to the shareholder by the Company. The note receivable is repayable on
demand and bears no interest.
The note payable to shareholder as of December 31, 1997 represented amounts
funded to the Company by the shareholder for working capital purpose and is
repayable on demand. The note payable bears no interest.
F-88
<PAGE>
GLOBAL BRIDGES TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JULY 23, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
AND THE YEAR ENDED DECEMBER 31, 1997
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. INCOME TAXES
Significant components of the provision for income taxes attributable to
operations are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 23, 1996
(INCEPTION)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------- ------------
<S> <C> <C>
Current:
Federal................................................ $1,656 $ --
State.................................................. 798 --
------ -----
$2,454 $ --
====== =====
</TABLE>
A reconciliation of income taxes at the statutory federal income tax rate to
net income taxes included in the accompanying statements of operations is as
follows:
<TABLE>
<CAPTION>
PERIOD FROM
JULY 23, 1996
(INCEPTION)
THROUGH YEAR ENDED
DECEMBER 31, DECEMBER 31,
1996 1997
------------- ------------
<S> <C> <C>
U.S. federal taxes at statutory rate..................... $(6,085) $ (11,188)
Impact of graduated U.S. statutory rate.................. (1,919) 192
State taxes, net of federal benefit...................... (397) (1,862)
Pre incorporation operations............................. 4,545 --
Valuation allowance...................................... 6,331 12,064
Other.................................................... (21) 794
------- ---------
$ 2,454 $ --
======= =========
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial and tax
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's net deferred tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1997
-------- ---------
<S> <C> <C>
Deferred tax assets:
Cash to accrual adjustment................................ $ 5,667 $ 17,053
Depreciation.............................................. 664 1,283
Net operating loss and tax credit carryovers.............. -- 59
------- ---------
Total deferred tax assets................................... 6,331 18,395
Valuation allowance......................................... (6,331) (18,395)
------- ---------
Total net deferred tax assets............................... $ -- $ --
======= =========
</TABLE>
The valuation allowance increased by $6,331 and $12,064 in 1996 and 1997
respectively.
F-89
<PAGE>
GLOBAL BRIDGES TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JULY 23, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
AND THE YEAR ENDED DECEMBER 31, 1997
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
3. INCOME TAXES (CONTINUED)
As of December 31, 1997, the Company has state net operating loss
carryforwards of approximately $1,000 that will expire in 2004. Due to the
change in ownership provisions of the Internal Revenue Code, the availability of
the Company's net operating loss carryforwards will be subject to an annual
limitation due to its acquisition by Xoom.com. This limitation could cause these
losses to expire prior to utilization by the Company.
4. STOCKHOLDERS' EQUITY
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock, no
par value, none of which is issued or outstanding. The Board of Directors has
the authority to issue preferred stock in one or more series and to fix the
designations, powers, preferences, rights, qualifications, limitations and
restrictions with respect to any series of preferred stock and to specify the
number of shares of any series of preferred stock without any further vote or
action by the shareholder.
COMMON STOCK
The Company is authorized to issue 10,000,000 shares of common stock, no par
value.
In July 1996, the Company issued 630,000 shares of its common stock in
exchange for cash of $5,000. During September 1997, the Company repurchased
130,000 shares of its common stock from a shareholder in exchange for royalties
to be paid on the future sales of certain products. No payments under this
royalty agreement have been made through December 31, 1997 and March 31, 1998 as
no sales of the products bearing royalties were made in those periods.
5. LEASE COMMITMENTS
The Company leases its operating facilities under a noncancelable operating
lease agreement that expires in 1998.
Total rent expense for the period from July 23, 1996 (inception) through
December 31, 1996 and the year ended December 31, 1997 totaled $4,605 and
$4,642, respectively.
6. RELATED PARTY TRANSACTIONS
During the period from July 23, 1996 (inception) through December 31, 1996
the Company paid certain expenses, totaling $3,918, on behalf of another company
which shares common ownership with the Company. All owed amounts were reimbursed
to the Company as of December 31, 1996.
7. SUBSEQUENT EVENTS
In April 1998, the Company issued 500,000 shares of its common stock to a
shareholder in exchange for cancellation of a note payable due to him of $3,929
and the assignment of a software license to the Company.
F-90
<PAGE>
GLOBAL BRIDGES TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
FOR THE PERIOD FROM JULY 23, 1996 (INCEPTION) THROUGH DECEMBER 31, 1996
AND THE YEAR ENDED DECEMBER 31, 1997
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998 IS UNAUDITED)
7. SUBSEQUENT EVENTS (CONTINUED)
In May 1998, the operating lease agreement for the lease of the Company's
facilities was assigned by the Company to the stockholder. As a result, all
rental payments are made to the stockholder. The minimum monthly rental payments
did not change from the original lease agreement with the lessor.
Effective June 11, 1998, the Company entered into a merger agreement with
Xoom.com, Inc. under which the outstanding shares of common stock of the Company
were exchanged for common shares of Xoom.com, Inc. and the right to receive
certain cash distributions from Xoom.com, Inc. The financial statements do not
include any adjustments to the recorded amounts of assets and liabilities which
may result from this transaction.
8. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This situation could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
F-91
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Pagecount, Inc.
We have audited the accompanying balance sheet of Pagecount, Inc. as of
December 31, 1997, and the related statements of income, stockholders' equity
and cash flows for the period from January 23, 1997 (inception) through
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pagecount, Inc. at December
31, 1997, and the results of its operations and its cash flows for the period
from January 23, 1997 (inception) through December 31, 1997, in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Palo Alto, California
July 7, 1998,
except for Note 6, as to which the date is,
July 24, 1998
F-92
<PAGE>
PAGECOUNT, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $14,627 $50,145
Accounts receivable....................................... 16,827 15,573
Unbilled receivables...................................... 4,931 2,133
Other current assets...................................... 725 725
------- -------
Total current assets........................................ 37,110 68,576
Fixed assets, net........................................... 16,661 20,597
------- -------
Total assets................................................ $53,771 $89,173
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 7,237 $29,475
Accrued compensation and related expenses................. 9,037 11,709
Other accrued liabilities................................. 10,051 --
Deferred revenue.......................................... -- 12,500
Income taxes payable...................................... 2,443 3,991
Deferred income taxes..................................... 3,042 3,042
------- -------
Total current liabilities................................... 31,810 60,717
------- -------
Commitment
Stockholders' equity:
Common stock, $1.00 par value:
Authorized shares--5,000
Issued and outstanding shares--115...................... 650 650
Retained earnings......................................... 21,311 27,806
------- -------
Total stockholders' equity.................................. 21,961 28,456
------- -------
Total liabilities and stockholders' equity.................. $53,771 $89,173
======= =======
</TABLE>
See accompanying notes.
F-93
<PAGE>
PAGECOUNT, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 23, JANUARY 23,
1997 1997
(INCEPTION) (INCEPTION) SIX MONTHS
THROUGH THROUGH ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Net revenue............................................ $252,332 $111,200 $208,689
Cost of net revenue.................................... 45,634 36,075 14,314
-------- -------- --------
Gross profit........................................... 206,698 75,125 194,375
Costs and expenses:
Sales and marketing.................................. 1,519 -- 2,371
General and administrative........................... 178,513 58,907 184,023
-------- -------- --------
Total costs and expenses............................... 180,032 58,907 186,394
-------- -------- --------
Income from operations................................. 26,666 16,218 7,981
Other income........................................... 130 -- 62
-------- -------- --------
Income before provision for income taxes............... 26,796 16,218 8,043
Provision for income taxes............................. 5,485 3,122 1,548
-------- -------- --------
Net income............................................. $ 21,311 $ 13,096 $ 6,495
======== ======== ========
</TABLE>
See accompanying notes.
F-94
<PAGE>
PAGECOUNT, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
----------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ -------- -------- --------
<S> <C> <C> <C> <C>
Issuance of common stock to founders in January
1997................................................ 115 $650 $ -- $ 650
Net income............................................ -- -- 21,311 21,311
--- ---- ------- -------
Balances at December 31, 1997........................... 115 650 21,311 21,961
Net income (unaudited)................................ -- -- 6,495 6,495
--- ---- ------- -------
Balances at June 30, 1998 (unaudited)................... 115 $650 $27,806 $28,456
=== ==== ======= =======
</TABLE>
See accompanying notes.
F-95
<PAGE>
PAGECOUNT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 23, JANUARY 23,
1997 1997
(INCEPTION) (INCEPTION) SIX MONTHS
THROUGH THROUGH ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH PROVIDED BY OPERATING ACTIVITIES
Net income............................................. $ 21,311 $ 13,096 $ 6,495
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation......................................... 2,689 878 3,876
Changes in operating assets and liabilities:
Accounts receivable................................ (16,827) (23,909) 1,254
Unbilled receivables............................... (4,931) (2,112) 2,798
Other current assets............................... (725) (725) --
Accounts payable................................... 7,237 4,119 22,238
Accrued compensation and related expenses.......... 9,037 8,951 2,672
Other accrued liabilities.......................... 10,051 22,595 (10,051)
Deferred revenue................................... -- -- 12,500
Income taxes payable............................... 2,443 3,122 1,548
Deferred income taxes.............................. 3,042 -- --
-------- -------- --------
Net cash provided by operating activities.............. 33,327 26,015 43,330
CASH USED IN INVESTING ACTIVITIES
Purchases of computer equipment........................ (19,350) (6,535) (7,812)
CASH PROVIDED BY FINANCING ACTIVITIES
Issuance of common stock for cash...................... 650 650 --
-------- -------- --------
Net increase in cash................................... 14,627 20,130 35,518
Cash at beginning of period............................ -- -- 14,627
-------- -------- --------
Cash at end of period.................................. $ 14,627 $ 20,130 $ 50,145
======== ======== ========
</TABLE>
See accompanying notes.
F-96
<PAGE>
PAGECOUNT, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE PERIOD FROM JANUARY 23, 1997 (INCEPTION) THROUGH JUNE 30,
1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Pagecount, Inc. (the "Company") was incorporated in the State of Maryland on
January 23, 1997.
The Company provides statistical counters which generate the number of times
a user views a customer's web site.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported results of operations during the reporting period. Actual results
could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim financial information as of June 30, 1998 and for the period
from January 23, 1997 (inception) through June 30, 1997 and the six months ended
June 30, 1998 is unaudited but has been prepared on the same basis as the
audited financial statements and include all adjustments, consisting only of
normal recurring adjustments, that the Company considers necessary for a fair
presentation of its financial position at such date and its results of
operations and cash flows for those periods. Operating results for the six
months ended June 30, 1998 are not necessarily indicative of results that may be
expected for any future periods.
CASH
The Company maintains its cash in depository accounts with one financial
institution.
UNBILLED RECEIVABLES
Unbilled receivables represent amounts earned as revenue but not yet billed
to customers.
CONCENTRATIONS OF CREDIT RISK
The Company conducts business primarily with companies in various industries
throughout the United States. The Company generally does not require collateral.
For the period from January 23, 1997 (inception) to December 31, 1997, three
customers accounted for 35%, 15%, and 11% of total revenue, and three customers
accounted for 27%, 20%, and 12% of accounts receivable at December 31, 1997.
For the six months ended June 30, 1998, two customers accounted for 42% and
12% of total revenue, and three customers accounted for 51%, 14%, and 10% of
accounts receivable at June 30, 1998.
FIXED ASSETS
Fixed assets are stated at cost, less accumulated depreciation. Depreciation
is computed using the straight-line method over the estimated useful lives of
the assets, which is estimated to be three years.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes" ("FAS 109"), which requires
F-97
<PAGE>
PAGECOUNT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE PERIOD FROM JANUARY 23, 1997 (INCEPTION) THROUGH JUNE 30,
1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
the use of the liability method in accounting for income taxes. Under FAS 109,
deferred tax assets and liabilities are measured based on differences between
the financial reporting and tax bases of assets and liabilities using enacted
rates and laws that will be in effect when the differences are expected to
reverse.
REVENUE RECOGNITION
Advertising revenue is derived from the sale of banner advertisements under
short-term contracts. To date, the duration of the Company's advertising
commitments has been from one to seven months. Advertising revenue on banner
contracts is recognized ratably in the period in which the advertisement is
displayed, provided that no significant Company obligations remain and
collection of the resulting receivable is probable. Company obligations
typically include the guarantee of a minimum number of "impressions" or times
that an advertisement appears in pages viewed by the users of the Company's
online properties. To the extent minimum guaranteed impressions are not met, the
Company defers recognition of the corresponding revenue until the remaining
guaranteed impression levels are achieved.
ADVERTISING EXPENSE
All advertising costs are expensed when incurred. Advertising costs, which
are included in sales and marketing expense, for the period from January 23,
1997 (inception) through December 31, 1997 were $1,124.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement No.
130, "Reporting Comprehensive Income" ("FAS 130"), and Statement No. 131,
"Disclosure about Segments of an Enterprise and Related Information" ("FAS
131"). The Company is required to adopt these statements in fiscal year 1998.
FAS 130 establishes new standards for reporting and displaying comprehensive
income and its components. FAS 131 requires disclosure of certain information
regarding operating segments, products and services, geographic areas of
operation and major customers. Adoption of these statements is expected to have
no impact on the Company's consolidated financial position, results of
operations or cash flows.
2. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
Computer equipment................................. $19,350 $27,162
Accumulated depreciation........................... (2,689) (6,565)
------- -------
$16,661 $20,597
======= =======
</TABLE>
F-98
<PAGE>
PAGECOUNT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE PERIOD FROM JANUARY 23, 1997 (INCEPTION) THROUGH JUNE 30,
1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
3. COMMITMENTS
The Company has entered into certain operating leases for office space. The
future minimum lease payments under the Company's noncancelable operating leases
at December 31, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $4,100
</TABLE>
The Company's rental expense under operating leases for the period from
January 23, 1997 (inception) through December 31, 1997 totaled $8,725.
4. COMMON STOCK
Common stock consists of the following at December 31, 1997:
<TABLE>
<CAPTION>
SHARES SHARES ISSUED
CLASS AUTHORIZED AND OUTSTANDING
- ----- ---------- ---------------
<S> <C> <C>
A................................................. 500 100
B................................................. 4,500 15
----- ---
5,000 115
===== ===
</TABLE>
5. INCOME TAXES
Significant components of the provision for income taxes attributable to
operations are as follows:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 23, JANUARY 23,
1997 1997
(INCEPTION) (INCEPTION) SIX MONTHS
THROUGH THROUGH ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Current:
Federal.............................................. $1,808 $2,311 $1,146
State................................................ 635 811 402
------ ------ ------
2,443 3,122 1,548
------ ------ ------
Deferred:
Federal.............................................. 2,281 -- --
State................................................ 761 -- --
------ ------ ------
3,042 -- --
------ ------ ------
Total provision........................................ $5,485 $3,122 $1,548
====== ====== ======
</TABLE>
F-99
<PAGE>
PAGECOUNT, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE PERIOD FROM JANUARY 23, 1997 (INCEPTION) THROUGH JUNE 30,
1997
AND FOR THE SIX MONTHS ENDED JUNE 30, 1998 IS UNAUDITED)
5. INCOME TAXES (CONTINUED)
A reconciliation of income taxes at the statutory federal income tax rate to
net income taxes included in the accompanying statements of income is as
follows:
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
JANUARY 23, JANUARY 23,
1997 1997
(INCEPTION) (INCEPTION) SIX MONTHS
THROUGH THROUGH ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1997 1997 1998
------------ ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
U.S. federal taxes at statutory rate................... $ 9,111 $ 5,514 $ 2,735
Impact of graduated U.S. tax at 15% statutory rate..... (5,092) (3,081) (1,589)
State income taxes, net of federal benefit............. 1,139 689 402
Other.................................................. 327 -- --
------- ------- -------
$ 5,485 $ 3,122 $ 1,548
======= ======= =======
</TABLE>
The principal source of the Company's deferred tax liabilities is the use of
accelerated depreciation methods for tax purposes.
6. SUBSEQUENT EVENT
Effective July 24, 1998, the Company entered into an asset sale agreement
under which it sold substantially all of its net assets to Xoom.com, Inc. The
financial statements do not include any adjustments to the recorded amounts of
assets and liabilities which may result from this transaction.
7. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
Based on a recent assessment, the Company has determined they will not be
required to modify or replace any portion of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter.
F-100
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Paralogic Software Corporation
We have audited the accompanying balance sheet of Paralogic Software
Corporation as of December 31, 1998, and the related statements of operations,
shareholders' equity and cash flows for the period from February 11, 1998
(inception) through December 31, 1998. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Paralogic Software
Corporation at December 31, 1998, and the results of its operations and its cash
flows for the period from February 11, 1998 (inception) through December 31,
1998, in conformity with generally accepted accounting principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
June 22, 1999
F-101
<PAGE>
PARALOGIC SOFTWARE CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ----------
<S> <C> <C>
(UNAUDITED)
ASSETS
Current assets:
Cash...................................................... $125,192 $ 198,533
Accounts receivable....................................... 24,745 108,762
Other current assets...................................... 4,300 4,975
-------- ----------
Total current assets........................................ 154,237 312,270
Fixed assets, net........................................... 16,077 21,431
-------- ----------
Total assets................................................ $170,314 $ 333,701
======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities.................. $ 5,866 $ 26,841
Deferred revenue.......................................... 26,506 266,460
Notes payable to shareholder.............................. 500 500
-------- ----------
Total current liabilities................................... 32,872 293,801
Shareholders' equity:
Convertible preferred stock, $0.66 par value: authorized
shares--400,000; issued and outstanding: 252,121 at
December 31, 1998 and March 31, 1999--less issuance
costs of $1,886; aggregate liquidation preference of
$166,400 at December 31, 1998 and March 31, 1999........ 164,514 164,514
Common stock, $0.01 par value: authorized
shares--7,000,000, issued and outstanding--4,972,726 at
December 31, 1998 and March 31, 1999.................... 436,250 3,861,292
Note receivable from shareholders........................... (2,527) (2,527)
Deferred compensation....................................... (251,669) (3,229,812)
Accumulated deficit......................................... (209,126) (753,567)
-------- ----------
Total shareholders' equity.................................. 137,442 39,900
-------- ----------
Total liabilities and shareholders' equity.................. $170,314 $ 333,701
======== ==========
</TABLE>
See accompanying notes.
F-102
<PAGE>
PARALOGIC SOFTWARE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
PERIOD FROM PERIOD FROM
FEBRUARY 11, FEBRUARY 11,
1998 (INCEPTION) 1998 (INCEPTION) THREE MONTHS
THROUGH THROUGH ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1999
---------------- ---------------- ------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Net revenue...................................... $ 239,481 $27,166 $ 72,877
Cost of net revenue.............................. 12,918 224 7,387
--------- ------- ---------
Gross profit..................................... 226,563 26,942 65,490
Operating expenses:
Research and development....................... 144,791 7,143 93,606
Sales and marketing............................ 72,395 3,572 46,803
General and administrative..................... 35,089 1,786 23,402
Amortization of deferred compensation.......... 182,054 -- 446,899
--------- ------- ---------
Total operating expenses......................... 434,329 12,501 610,710
--------- ------- ---------
Operating (loss) income.......................... (207,766) 14,441 (545,220)
Other income (expense), net...................... (1,360) -- 779
--------- ------- ---------
Net (loss) income................................ $(209,126) $14,441 $(544,441)
========= ======= =========
</TABLE>
See accompanying notes.
F-103
<PAGE>
PARALOGIC SOFTWARE CORPORATION
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE PERIOD FROM FEBRUARY 11, 1998 (INCEPTION) THROUGH DECEMBER 31, 1998
<TABLE>
<CAPTION>
CONVERTIBLE NOTE
PREFERRED STOCK COMMON STOCK RECEIVABLE
-------------------- ---------------------- FROM DEFERRED ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHAREHOLDERS COMPENSATION DEFICIT
-------- --------- --------- ---------- ------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock to
founders.................... -- $ -- 4,000,000 $ -- $ -- $ -- $ --
Issuance of common stock in
exchange for note
receivable.................. -- -- 972,726 2,527 (2,527) -- --
Issuance of Series A
convertible preferred stock
net of issuance costs of
$1,886...................... 252,121 164,514 -- -- -- -- --
Deferred compensation related
to grant of stock options... -- -- -- 433,723 -- (433,723) --
Amortization of deferred
compensation................ -- -- -- -- -- 182,054 --
Net loss...................... -- -- -- -- -- -- (209,126)
------- -------- --------- ---------- ------- ----------- ---------
Balances at December 31, 1998... 252,121 164,514 4,972,726 436,250 (2,527) (251,669) (209,126)
Deferred compensation related
to grant of stock options
(unaudited)................. -- -- -- 3,425,042 -- (3,425,042) --
Amortization of deferred
compensation (unaudited).... -- -- -- -- -- 446,899 --
Net loss (unaudited).......... -- -- -- -- -- -- (544,441)
------- -------- --------- ---------- ------- ----------- ---------
Balances at March 31, 1999
(unaudited)................... 252,121 $164,514 4,972,726 $3,861,292 $(2,527) $(3,229,812) $(753,567)
======= ======== ========= ========== ======= =========== =========
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
--------------
<S> <C>
Issuance of common stock to
founders.................... $ --
Issuance of common stock in
exchange for note
receivable.................. --
Issuance of Series A
convertible preferred stock
net of issuance costs of
$1,886...................... 164,514
Deferred compensation related
to grant of stock options... --
Amortization of deferred
compensation................ 182,054
Net loss...................... (209,126)
--------
Balances at December 31, 1998... 137,442
Deferred compensation related
to grant of stock options
(unaudited)................. --
Amortization of deferred
compensation (unaudited).... 446,899
Net loss (unaudited).......... (544,441)
--------
Balances at March 31, 1999
(unaudited)................... $ 39,900
========
</TABLE>
See accompanying notes.
F-104
<PAGE>
PARALOGIC SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 11,
1998 (INCEPTION) THREE MONTHS
YEAR ENDED THROUGH ENDED
DECEMBER 31, MARCH 31, MARCH 31,
1998 1998 1999
------------ ---------------- ------------
<S> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) income........................................... $(209,126) $14,441 $ (544,441)
Adjustments to reconcile net (loss) income to net cash (used
in) provided by operations:
Depreciation and amortization......................... 3,540 -- 1,301
Amortization of deferred compensation................. 182,054 -- 446,899
Changes in operating assets and liabilities:
Accounts receivable................................. (24,745) (2,098) (84,017)
Other current assets................................ (4,300) (1,108) (675)
Accounts payable and accrued liabilities............ 5,866 1,877 20,975
Deferred revenue.................................... 26,506 -- 239,954
--------- ------- ----------
Net cash (used in) provided by operating activities......... (20,205) 13,112 79,996
CASH FLOWS FROM INVESTING ACTIVITIES
Net purchases of property and equipment..................... (19,617) (62) (6,655)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable to shareholder...... 500 500 --
Proceeds from issuance of preferred stock................... 164,514 -- --
--------- ------- ----------
Net cash provided by financing activities................... 165,014 500 --
--------- ------- ----------
Net increase in cash........................................ 125,192 13,550 73,341
Cash, beginning of period................................... -- -- 125,192
--------- ------- ----------
Cash, end of period......................................... $ 125,192 $13,550 $ 198,533
========= ======= ==========
SUPPLEMENTAL DISCLOSURE
Issuance of common stock in exchange for note
receivable from shareholder............................... $ 2,527 $ -- $ --
========= ======= ==========
Deferred compensation resulting from issuance of stock
options................................................... $ 433,723 $ -- $3,425,042
========= ======= ==========
</TABLE>
See accompanying notes.
F-105
<PAGE>
PARALOGIC SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE PERIOD FROM FEBRUARY 11, 1998 (INCEPTION) THROUGH
MARCH 31, 1998
AND THE THREE MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Paralogic Software Corporation (the "Company") was incorporated in
California on February 11, 1998.
The Company provides Web site chat room hosting, fee-for-service web site
development, and sells internet software. The Company is the result of a spin
out of certain technology rights and assets from a predecessor company,
Paralogic Corporation ("PC"). In exchange for the technology rights and assets,
the Company issued to certain shareholders of PC 4,000,000 shares of Paralogic
Software Corporation common stock.
BASIS OF PRESENTATION
The Company has incurred losses since inception and has an accumulated
deficit at December 31, 1998. The accompanying financial statements have been
prepared assuming that the Company will continue as a going concern. The Company
will require additional financing to fund operations in 1999. On June 10, 1999,
the Company entered into an agreement under which it will be acquired by
Xoom.com, Inc. The majority of the shareholders of the Company are also
shareholders and officers of Xoom.com, Inc. Effective June 16, 1999, the Company
was acquired by Xoom.com, Inc. The financial statements do not include any
adjustments to the recorded amounts of assets and liabilities which may result
from this transaction.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported results of operations during the reporting period. Actual results
could differ from those estimates.
INTERIM FINANCIAL INFORMATION
The interim financial information as of March 31, 1999 and for the three
months ended March 31, 1998 and 1999 is unaudited but has been prepared on the
same basis as the audited financial statements and includes all adjustments,
consisting only of normal recurring adjustments, that the Company considers
necessary for a fair presentation of its financial position at such date and its
results of operations and cash flows for those periods. Operating results for
the three months ended March 31, 1999, are not necessarily indicative of results
that may be expected for any future periods.
CASH
The Company maintains its cash in depository accounts with one financial
institution.
F-106
<PAGE>
PARALOGIC SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE PERIOD FROM FEBRUARY 11, 1998 (INCEPTION) THROUGH
MARCH 31, 1998
AND THE THREE MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATIONS OF CREDIT RISK
The Company conducts business primarily with individuals and companies
throughout the United States. The Company generally does not require collateral.
FIXED ASSETS
Fixed assets are recorded at cost, less accumulated depreciation.
Depreciation is computed using the straight-line method over the estimated
useful lives of three, five, and seven years for computer software, computer
hardware and furniture and fixtures, respectively.
REVENUE RECOGNITION
SERVICES
The majority of the Company's service revenue is from fees charged for chat
network hosting and web site development which are recognized when the services
are performed.
LICENSE FEES
The Company licenses software under non-cancelable license agreements to
end-users. License fee revenue is recognized when a non-cancelable license
agreement has been signed, the product has been delivered, there are no
uncertainties surrounding product acceptance, the fees are fixed and
determinable and collection is considered probable. Customer support revenues
are deferred and recognized on a straight-line basis over the period covered by
such agreements.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards Board Statement No. 109, "Accounting for Income
Taxes" ("FAS 109"), which requires the use of the liability method in accounting
for income taxes. Under FAS 109, deferred tax assets and liabilities are
measured based on differences between the financial reporting and tax bases of
assets and liabilities using enacted rates and laws that are expected to be in
effect when the differences are expected to reverse. No provision for income
taxes was recorded on the income for the period from February 11, 1998
(inception) through March 31, 1998, as the Company incurred a loss for the
entire period from February 11, 1998 through December 31, 1998.
STOCK BASED COMPENSATION
The Company accounts for stock-based awards to employees under the intrinsic
value method in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25") and has adopted the
disclosure-only alternative of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("FAS 123").
F-107
<PAGE>
PARALOGIC SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE PERIOD FROM FEBRUARY 11, 1998 (INCEPTION) THROUGH
MARCH 31, 1998
AND THE THREE MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130, "Reporting Comprehensive Income" ("FAS 130") which
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. The adoption
of this standard had no impact on the Company's financial position,
shareholders' equity, results of operations or cash flows.
AICPA Accounting Standards Executive Committee Statement of Position 97-2,
"Software Revenue Recognition," ("SOP 97-2") and Statement of Position 98-4
("SOP 98-4"), "Deferral of the Effective Date of a Provision" of SOP 97-2,
Software Revenue Recognition or SOP 98-4, which contain new rules for timing of
recognition of software company revenues, particularly as to license fee
revenues where there are multiple elements to be delivered under a contract or
arrangement with a customer, became effective for transactions beginning in
1998. Management believes the Company's current policy and its practices conform
to the rules in these new accounting pronouncements. Under the Company's current
policy, license fees on standard software products not requiring substantial
modification and customization are recognized as revenue upon shipment to
customers.
In December 1998, the American Institute of Certified Public Accountants or
AICPA issued Statement of Position 98-9, Modification of SOP 97-2, Software
Revenue Recognition, With Respect Certain Transactions, or SOP 98-9. SOP 98-9
amends SOP 98-4 to extend the deferral of the application of certain passages of
SOP 97-2 provided by SOP 98-4 through fiscal years beginning on or before
March 15, 1999. All other provisions of SOP 98-9 are effective for transactions
entered into in fiscal years beginning after March 15, 1999. The Company has not
yet determined the effect of the final adoption of SOP 98-9 on its future
revenues and results of operations.
2. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ---------
<S> <C> <C>
Computer software........................................... $ 1,028 $ 1,266
Computer hardware........................................... 14,741 21,157
Furniture and fixtures...................................... 3,848 3,849
------- -------
19,617 26,272
Accumulated depreciation.................................... (3,540) (4,841)
------- -------
$16,077 $21,431
======= =======
</TABLE>
F-108
<PAGE>
PARALOGIC SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE PERIOD FROM FEBRUARY 11, 1998 (INCEPTION) THROUGH
MARCH 31, 1998
AND THE THREE MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)
3. NOTE PAYABLE TO SHAREHOLDER
The note payable to shareholder as of December 31, 1998 represented amounts
funded to the Company by the shareholder for working capital purpose and is
repayable on demand. The note payable bears no interest.
4. INCOME TAXES
There has been no provisions for federal or state income taxes for any
period as the Company has incurred operating losses in all periods.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
Deferred tax assets:
Net operating loss carryforward........................... $ 8,914
Other..................................................... 3,051
-------
Net deferred tax assets................................... 11,965
Valuation allowance....................................... (11,965)
-------
Total....................................................... $ --
=======
</TABLE>
Realization of deferred tax assets is dependent upon future earnings, if
any, the timing and amount of which are uncertain. Accordingly, the net deferred
tax assets have been fully offset by a valuation allowance as it is more likely
than not that the deferred tax assets will not be realized. The net valuation
allowance increased by $11,965 during the period from February 11, 1998
(inception) through December 31, 1998.
As of December 31, 1998, the Company had net operating loss carryforwards
for federal income tax purposes of approximately $22,000 which expire in the
year 2018.
Due to the "change in ownership" provisions of the Internal Revenue Code,
the availability of the Company's net operating loss credit carryforwards will
be subject to an annual limitation against taxable income in future periods if a
change in ownership of more than 50% of the value of the Company's stock should
occur over a three-year period which could substantially limit the eventual
utilization of these carryforwards.
5. SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 400,000 shares of preferred stock all of
which is designated "Series A Preferred." The Company will from time to time in
accordance with the laws of the State of California increase the authorized
amount of its Common Stock if at any time the number of shares of Common Stock
remaining unissued and available for issuance is not sufficient to permit
conversion of the Preferred Stock.
F-109
<PAGE>
PARALOGIC SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE PERIOD FROM FEBRUARY 11, 1998 (INCEPTION) THROUGH
MARCH 31, 1998
AND THE THREE MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
In November 1998, the Company issued 252,121 shares of Series A Preferred
Stock, which was outstanding as of December 31, 1998 and March 31, 1999. The
holders of the outstanding Preferred Stock are entitled to receive, when and as
declared by the Board of Directors, dividends at the rate of $0.05 per share per
annum, payable in preference and priority to any payment of any dividend on
Common Stock of the Company.
In the event of any liquidation, dissolution, or winding up of the Company,
either voluntary or involuntary, the holders of the Preferred Stock will be
entitled to receive, prior and in preference to any distribution of any of the
assets or surplus funds of the Company to the holders of the Common Stock by
reason of their ownership of such stock, the amount of $0.66 per share for each
share of Preferred Stock then held by them.
Each share of the Preferred Stock is convertible, at the option of the
holder into such number of fully paid and non assessable shares of Common Stock
as is determined by dividing $0.66 by the Conversion Price in effect at the time
of conversion.
COMMON STOCK
The Company is authorized to issue 7,000,000 shares of common stock at par
value. As of December 31, 1998 and March 31, 1999, the Company has 4,972,726
shares of common stock issued and outstanding.
STOCK OPTIONS
In November 1998, the Board of Directors of the Company approved the
Company's 1998 stock incentive plan (the "1998 Plan") and initially reserved
1,500,000 shares for issuance thereunder. Stock options generally vest over
different periods from immediately to 25% at the end of the first year and
monthly thereafter up to a maximum of four years.
A summary of activity under the 1998 Plan is as follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED-
AVAILABLE FOR OPTIONS AVERAGE
GRANT OUTSTANDING EXERCISE PRICE
------------- ----------- --------------
<S> <C> <C> <C>
Shares authorized...................................... 1,500,000 -- $ --
Options granted...................................... (119,250) 119,250 0.07
Options exercised.................................... -- -- --
--------- ------- -----
Balance at December 31, 1998........................... 1,380,750 119,250 0.07
Options granted (unaudited).......................... (235,000) 235,000 0.07
Options exercised (unaudited)........................ -- -- --
Options canceled (unaudited)......................... -- -- --
--------- ------- -----
Balance at March 31, 1999.............................. 1,145,750 354,250 $0.07
========= ======= =====
</TABLE>
F-110
<PAGE>
PARALOGIC SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE PERIOD FROM FEBRUARY 11, 1998 (INCEPTION) THROUGH
MARCH 31, 1998
AND THE THREE MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
The options outstanding at March 31, 1999 have been segregated for
additional disclosure as follows:
<TABLE>
<CAPTION>
WEIGHTED- OPTIONS
OPTIONS AVERAGE CURRENTLY
OUTSTANDING REMAINING EXERCISABLE WEIGHTED-
EXERCISE AT MARCH 31, CONTRACTUAL AT MARCH 31, AVERAGE
PRICE 1999 LIFE (IN YEARS) 1999 EXERCISE PRICE
- -------- ------------ --------------- ------------ --------------
<S> <C> <C> <C> <C>
$0.07.................... 354,250 9.7 75,000 $0.07
</TABLE>
DEFERRED COMPENSATION
The Company has recorded deferred compensation charges of $433,723 and
$3,425,042 during the period from February 11, 1998 (inception) through
December 31, 1998 and for the three months ended March 31, 1999, respectively,
for the difference between the exercise price and the deemed fair value of
certain stock options granted by the Company. These amounts are being amortized
by charges to operations, using the graded method, over the vesting periods of
the individual stock options, which are generally four years.
PRO FORMA DISCLOSURE OF THE EFFECT OF STOCK-BASED COMPENSATION
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires the use of
option valuation models that were not developed for use in valuing employee
stock options.
Pro forma information regarding net income (loss) and net income (loss) per
share is required by FAS 123. This information is required to be determined as
if the Company has accounted for its employee stock options under the fair value
method of FAS 123. Under this method, the estimated fair value of the options is
amortized to expense over the options' vesting period. The fair value for these
options was estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 11
1998 (INCEPTION)
THROUGH
DECEMBER 31,
1998
----------------
<S> <C>
Risk-free interest rate..................................... 5.5%
Expected life of the option................................. 5 years
Expected Volatility......................................... 0%
Expected dividend yield..................................... 0%
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
F-111
<PAGE>
PARALOGIC SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE PERIOD FROM FEBRUARY 11, 1998 (INCEPTION) THROUGH
MARCH 31, 1998
AND THE THREE MONTHS ENDED MARCH 31, 1999 IS UNAUDITED)
5. SHAREHOLDERS' EQUITY (CONTINUED)
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The effect of applying the Black-Scholes option valuation model did not
result in pro forma net loss amounts that are materially different from
historical amounts reported. Therefore, such pro forma amounts are not reported
herein. Future pro forma amounts may be materially different from actual amounts
reported.
The weighted average fair value of options granted to employees during the
period from February 11, 1998 (inception) through December 31, 1998 was $0.04
per share.
6. LEASE COMMITMENTS
The Company leases its operating facilities under a noncancelable operating
lease agreement that expires in October 1999. The lease commitment for 1999 is
$19,350.
Total rent expense for the period from February 11, 1998 (inception) through
December 31, 1998 was $12,250.
7. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using
two digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This situation could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company believes that it will not be required to modify or replace any
portion of its software so that its computer system will function properly with
respect to dates in the year 2000 and thereafter.
F-112
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
MightyMail Networks, Inc.
We have audited the accompanying balance sheets of MightyMail
Networks, Inc. as of December 31, 1997 and 1998, and the related statements of
operations, stockholders' equity (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of MightyMail Networks, Inc. at
December 31, 1997 and 1998, and the results of its operations and its cash flows
for the periods then ended, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Palo Alto, California
June 4, 1999
F-113
<PAGE>
MIGHTYMAIL NETWORKS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1997 1998 1999
--------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash..................................................... $ 9,553 $ 21,495 $ 38,719
Accounts receivable...................................... 203,500 -- --
Stock subscription receivable............................ -- 200,000 150,000
Prepaid expenses and other current assets................ 6,500 3,015 2,500
-------- -------- ----------
Total current assets....................................... 219,553 224,510 191,219
Fixed assets, net.......................................... 65,999 29,562 76,348
-------- -------- ----------
Total assets............................................... $285,552 $254,072 $ 267,567
======== ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable......................................... $152,123 $147,800 $ 206,663
Accrued compensation and related expenses................ 24,145 31,790 39,081
Other accrued liabilities................................ 15,065 876 200
Stock subscription payable............................... -- 60,000 60,000
-------- -------- ----------
Total current liabilities.................................. 191,333 240,466 305,944
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value
Authorized shares--10,000,000
Issued and outstanding shares--none and 400,000 at
December 31, 1997 and 1998, respectively, and
1,020,000 at March 31, 1999; aggregate liquidation
preference of $200,000 and $510,000 at December 31,
1998 and March 31, 1999 respectively................. -- 168,421 451,148
Common stock, $0.001 par value
Authorized shares--20,000,000
Issued and outstanding shares--2,480,000 and 2,555,000
at December 31, 1997 and 1998, respectively, and
2,767,000 at March 31, 1999.......................... 10,000 41,579 2,392,822
Note receivable from stockholder........................... -- -- (6,850)
Deferred compensation...................................... -- -- (1,468,067)
Retained earnings (accumulated deficit).................... 84,219 (196,394) (1,407,430)
-------- -------- ----------
Total stockholders' equity (deficit)..................... 94,219 13,606 (38,377)
-------- -------- ----------
Total liabilities & stockholders equity (deficit)........ $285,552 $254,072 $ 267,567
======== ======== ==========
</TABLE>
See accompanying notes.
F-114
<PAGE>
MIGHTYMAIL NETWORKS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
--------------------- -----------------------
1997 1998 1998 1999
--------- --------- --------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED) (UNAUDITED)
Net revenue:
Consulting revenue......................... $ 931,671 $ 351,042 $230,490 $ --
License fees and other..................... 225,000 4,408 -- --
--------- --------- --------- -----------
Total net revenue............................ 1,156,671 355,450 230,490 --
Cost of revenue.............................. 651,533 215,935 167,805 --
--------- --------- --------- -----------
Gross profit................................. 505,138 139,515 62,685 --
Operating expenses:
Operating and development.................. 257,613 61,937 50,406 462,228
Sales and marketing........................ 43,387 57,246 14,093 18,467
General and administrative................. 298,439 296,311 103,554 205,401
Amortization of deferred compensation...... -- -- -- 523,603
--------- --------- --------- -----------
Total operating expenses..................... 599,439 415,494 168,053 1,209,699
--------- --------- --------- -----------
Loss from operations......................... (94,301) (275,979) (105,368) (1,209,699)
Other income (expense):
Interest income............................ 1,969 878 360 1,122
Interest expense........................... (3,071) (5,512) (1,390) (2,459)
--------- --------- --------- -----------
Net loss..................................... $ (95,403) $(280,613) $(106,398) $(1,211,036)
========= ========= ========= ===========
</TABLE>
See accompanying notes.
F-115
<PAGE>
MIGHTYMAIL NETWORKS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
SERIES A NOTE RETAINED
PREFERRED STOCK COMMON STOCK RECEIVABLE EARNINGS
--------------------- ---------------------- FROM DEFERRED (ACCUMULATED
SHARES AMOUNT SHARES AMOUNT STOCKHOLDER COMPENSATION DEFICIT)
--------- --------- --------- ---------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1996........ -- $ -- 2,480,000 $ 10,000 $ -- $ -- $ 179,622
Net income for the year............ -- -- -- -- -- -- (95,403)
--------- -------- --------- ---------- ------- ----------- -----------
Balances at December 31, 1997........ -- -- 2,480,000 10,000 -- -- 84,219
Issuance of Series A preferred
stock in exchange for stock
subscription receivable.......... 400,000 168,421 -- -- -- -- --
Issuance of common stock in
exchange for stock subscription
receivable....................... -- -- 75,000 31,579 -- -- --
Net loss for the year.............. -- -- -- -- -- -- (280,613)
--------- -------- --------- ---------- ------- ----------- -----------
Balances at December 31, 1998........ 400,000 168,421 2,555,000 41,579 -- -- (196,394)
Issuance of Series A preferred
stock for cash (unaudited)....... 320,000 132,727 -- -- -- -- --
Issuance of common stock for cash
(unaudited)...................... -- -- 75,000 27,273 -- -- --
Issuance of Series A preferred
stock in exchange for stock
subscription receivable
(unaudited)...................... 300,000 150,000 -- -- -- -- --
Issuance of stock options to
consultants (unaudited).......... -- -- -- 325,450 -- -- --
Deferred compensation expense
related to the issuance of stock
options to employees
(unaudited)...................... -- -- -- 1,991,670 -- (1,991,670) --
Amortization of deferred
compensation (unaudited)......... -- -- -- -- -- 523,603 --
Exercise of stock options in
exchange for a note receivable
(unaudited)...................... -- -- 137,000 6,850 (6,850) -- --
Net loss (unaudited)............... -- -- -- -- -- -- (1,211,036)
--------- -------- --------- ---------- ------- ----------- -----------
Balances at March 31, 1999
(unaudited)........................ 1,020,000 $451,148 2,767,000 $2,392,822 $(6,850) $(1,468,067) $(1,407,430)
========= ======== ========= ========== ======= =========== ===========
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY
(DEFICIT)
-------------
<S> <C>
Balances at December 31, 1996........ $ 189,622
Net income for the year............ (95,403)
----------
Balances at December 31, 1997........ 94,219
Issuance of Series A preferred
stock in exchange for stock
subscription receivable.......... 168,421
Issuance of common stock in
exchange for stock subscription
receivable....................... 31,579
Net loss for the year.............. (280,613)
----------
Balances at December 31, 1998........ 13,606
Issuance of Series A preferred
stock for cash (unaudited)....... 132,727
Issuance of common stock for cash
(unaudited)...................... 27,273
Issuance of Series A preferred
stock in exchange for stock
subscription receivable
(unaudited)...................... 150,000
Issuance of stock options to
consultants (unaudited).......... 325,450
Deferred compensation expense
related to the issuance of stock
options to employees
(unaudited)...................... --
Amortization of deferred
compensation (unaudited)......... 523,603
Exercise of stock options in
exchange for a note receivable
(unaudited)...................... --
Net loss (unaudited)............... (1,211,036)
----------
Balances at March 31, 1999
(unaudited)........................ $ (38,377)
==========
</TABLE>
See accompanying notes.
F-116
<PAGE>
MIGHTYMAIL NETWORKS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- ------------------------
<S> <C> <C> <C> <C>
1997 1998 1998 1999
-------- --------- ---------- -----------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net loss............................................... $(95,403) $(280,613) $ (106,398) $(1,211,036)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation......................................... 39,521 41,193 12,471 6,381
Amortization of deferred compensation................ -- -- -- 523,603
Issuance of stock options to consultants............. -- -- -- 325,450
Loss (gain) on disposal of fixed assets.............. 414 (850) -- --
Changes in operating assets and liabilities:
Accounts receivable................................ (148,500) 203,500 203,500 --
Prepaid expenses and other current assets.......... 6,876 3,485 (8,019) 515
Accounts payable................................... 125,704 (4,323) 19,100 58,863
Accrued compensation and related expenses.......... 13,127 7,645 3,149 7,291
Other accrued liabilities.......................... 1,003 (14,189) (14,387) (676)
-------- --------- ---------- -----------
Net cash provided by (used in) operating activities.... (57,258) (44,152) 109,416 (289,609)
INVESTING ACTIVITIES
Purchases of fixed assets.............................. (13,904) (4,756) -- (53,167)
Proceeds from sale of fixed assets..................... 1,750 850 -- --
-------- --------- ---------- -----------
Net cash used in investing activities.................. (12,154) (3,906) -- (53,167)
FINANCING ACTIVITIES
Proceeds from issuance of preferred stock.............. -- -- -- 132,727
Proceeds from issuance of common stock................. -- -- -- 27,273
Proceeds from repayment of stock subscription
receivable........................................... -- -- -- 200,000
Proceeds from issuance of stock subscription payable... -- 60,000 -- --
-------- --------- ---------- -----------
Net cash provided by financing activities.............. -- 60,000 -- 360,000
-------- --------- ---------- -----------
Net increase (decrease) in cash........................ (69,412) 11,942 109,416 17,224
Cash at beginning of period............................ 78,965 9,553 9,553 21,495
-------- --------- ---------- -----------
Cash at end of period.................................. $ 9,553 $ 21,495 $ 118,969 $ 38,719
======== ========= ========== ===========
SUPPLEMENTAL DISCLOSURES:
Non-cash transactions:
Issuance of preferred stock in exchange for stock
subscription receivable............................ $ -- $ 168,421 $ -- $ 150,000
======== ========= ========== ===========
Issuance of common stock in exchange for stock
subscription receivable............................ $ -- $ 31,579 $ -- $ --
======== ========= ========== ===========
Deferred compensation resulting from grant of stock
options............................................ $ -- $ -- $ -- $ 1,991,670
======== ========= ========== ===========
Exercise of stock option in exchange for notes
receivable from stockholder........................ $ -- $ -- $ -- $ 6,850
======== ========= ========== ===========
</TABLE>
See accompanying notes.
F-117
<PAGE>
MIGHTYMAIL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
On October 16, 1998, MightyMail Networks LLC and Oompala, Inc. merged to
form MightyMail Networks, Inc. (the "Company"). MightyMail Networks LLC was
formed on June 15, 1998, in Delaware. Oompala, Inc. was incorporated on
January 10, 1995, in California.
Oompala, Inc. was previously a fee-for-service company whereby products were
developed on a contractual basis. After the merger, the Company began focusing
on an enhanced e-mail product which enables customization of e-mail according to
user preferences.
BASIS OF PRESENTATION
The Company experienced recurring losses and has an accumulated deficit at
December 31, 1998. The accompanying financial statements have been prepared
assuming that the Company will continue as a going concern. The Company will
require additional financing to fund operations in 1999. Effective May 3, 1999,
the Company agreed to be acquired by Xoom.com, Inc. The financial statements do
not include any adjustments to the recorded amounts of assets and liabilities
which may result from this transaction.
INTERIM FINANCIAL INFORMATION
The interim financial information for the three months ended March 31, 1998
and 1999, is unaudited but has been prepared on the same basis as the audited
financial statements and includes all adjustments, consisting only of normal
recurring adjustments, that the Company considers necessary for a fair
presentation of its financial position at such date and its results of
operations and cash flows for those periods. Operating results for the three
months ended March 31, 1999, are not necessarily indicative of results that may
be expected for any future periods.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported results of operations during the reporting period. Actual results
could differ from those estimates.
CASH
The Company maintains its cash in depository accounts with one financial
institution.
CONCENTRATIONS OF CREDIT RISK AND CREDIT EVALUATIONS
Financial instruments which subject the Company to concentrations of credit
risk consist primarily of trade accounts receivable. The Company conducts
business with companies in various industries throughout the world and with
individuals over the Internet. The Company performs
F-118
<PAGE>
MIGHTYMAIL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ongoing credit evaluations of its corporate customers and generally does not
require collateral. Sales to individuals are principally paid for in cash. To
date, the Company has not experienced any credit losses.
FIXED ASSETS
Fixed assets are stated at cost less accumulated depreciation. Depreciation
is computed using the straight-line method over the estimated useful lives of
three years. Useful lives are evaluated regularly by management in order to
determine recoverability in light of current technological conditions. The
Company identifies and records impairment losses on fixed assets when events and
or circumstances indicate that such assets might be impaired. To date, no such
impairment has been recorded.
INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("FAS 109"), which requires the use of the liability method in accounting for
income taxes. Under FAS 109, deferred tax assets and liabilities are measured
based on differences between the financial reporting and tax bases of assets and
liabilities using enacted tax rates and laws that are expected to be in effect
when the differences are expected to reverse.
STOCK-BASED COMPENSATION
The Company accounts for stock-based awards to employees in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") and has adopted the disclosure-only alternative of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123").
REVENUE RECOGNITION
The Company's primary source of revenue during 1997 and 1998 was
fee-for-service on a contractual basis. These revenues were recognized as the
Company provided the services. There has been no revenue since July 1998 when
the Company changed its focus to develop its enhanced e-mail product.
LICENSE FEES
During 1997, the Company licensed software under non-cancelable license
agreements to end-users and non-cancelable sub-license agreements to resellers.
License fee revenues were recognized when a non-cancelable license agreement was
signed, the product was delivered, there were no uncertainties surrounding
product acceptance, the fees were fixed and determinable and collection was
probable.
F-119
<PAGE>
MIGHTYMAIL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
EXPORT SALES
Export sales were to customers in Japan and totaled $303,900 and $4,408
which represent 26% and 1% of net revenue for the years ended December 31, 1997
and 1998.
RECENT ACCOUNTING PRONOUNCEMENTS
As of January 1, 1998, the Company adopted Financial Accounting Standards
Board Statement No. 130 ("SFAS 130"), "Reporting Comprehensive Income, which
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. The Company
had no material components of comprehensive income. The adoption of this
standard has had no impact on the Company's financial position, stockholders'
equity, results of operations or cash flows. Accordingly, the Company's
comprehensive loss for the years ended December 31, 1997 and 1998 and the three
months ended March 31, 1998 and 1999, is equal to its reported loss.
2. FIXED ASSETS
Fixed assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31,
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Computers and equipment................... $143,500 $ 145,558 $ 198,725
Furniture and fixtures.................... 1,837 1,837 1,837
-------- --------- ---------
145,337 147,395 200,562
Less accumulated depreciation............. (79,338) (117,833) (124,214)
-------- --------- ---------
$ 65,999 $ 29,562 $ 76,348
======== ========= =========
</TABLE>
3. INCOME TAXES
The Company's shareholders have previously elected to be treated as an S
Corporation for federal and state income tax purposes. As an S Corporation, the
current federal and state taxable income is allocated to the stockholders who
are responsible for the payment of taxes thereon. Accordingly, the accompanying
financial statements do not include a provision for federal or state income
taxes.
4. STOCKHOLDERS' EQUITY
The Company's Board of Directors authorized 10,000,000 shares of preferred
stock and 20,000,000 shares of common stock both with a par value of $0.001 per
share.
F-120
<PAGE>
MIGHTYMAIL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
STOCK SPLIT
In October 1998, the Company completed a 2.48-to-1 stock split of the
outstanding shares of common stock. All share information and per share amounts
in the accompanying financial statements have been retroactively adjusted to
reflect the effect of this stock split.
CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 1,620,000 shares of Series A preferred
stock, of which 1,020,000 shares were issued and outstanding at March 31, 1999
at prices ranging from $0.36 to $0.50 per share. The holders of the outstanding
Preferred Stock are entitled to receive, when and as declared by the Board of
Directors, dividends at the rate of $0.04 per share per annum, payable in
preference and priority to any payment of any dividend on Common Stock of the
Company.
In the event of any liquidation, dissolution, or winding up of the Company,
either voluntary or involuntary, the holders of the Preferred Stock will be
entitled to receive, prior and in preference to any distribution of any of the
assets or surplus funds of the Company to the holders of the Common Stock by
reason of their ownership of such stock, the amount of $0.50 per share for each
share of Preferred Stock then held by them.
Each share of Preferred Stock is convertible, at the option of the holder
into such number of fully paid and non assessable shares of Common Stock as is
determined by dividing $0.50 by the conversion price in effect at the time of
conversion.
An additional 200,000 shares of Series A preferred shares were issued for
cash on April 5, 1999.
WARRANTS
In connection with the issuance of Series A preferred stock in the year
ended December 31, 1998 and the three months ended March 31, 1999, the Company
issued warrants to purchase a total of 350,000 shares of Series A preferred
stock at a price of $0.50 per share. These warrants are immediately exercisable
and expire on December 31, 1999.
COMMON SHARES
The Company issued 150,000 shares of common stock in conjunction with
subscriptions of Series A preferred stock in the period December 1998 through
January 1999 at prices ranging from $0.36 to $0.42 per share.
STOCK OPTION PLAN
The Company has reserved 1,017,125 shares of common stock under the
Company's 1999 Stock Option Plan (the "Plan"). The Plan provides for incentive
stock options, as defined by the Internal Revenue Code, to be granted to
employees and certain non-employee consultants, at an exercise price not less
than 100% of the fair value at the grant date as determined by the Board of
Directors. The Plan also provides for nonqualified stock options to be issued to
non-employee
F-121
<PAGE>
MIGHTYMAIL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
officers, directors and consultants at an exercise price of not less than 85% of
the fair value at the grant date unless optionee is a 10% shareholder in which
case option price will not be less than 110% of such fair value. Option vesting
schedules are determined by the Board of Directors at the time of issuance.
Stock options generally vest over different periods ranging from immediately to
50% at the end of the first year and monthly thereafter up to a maximum of three
years. Upon a change of control, as defined in the Plan, 50% of unvested options
become immediately vested.
A summary of the option activity is as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- ----------------
<S> <C> <C>
Balance at December 31, 1998..................... -- $ --
Options granted (unaudited).................... 392,000 0.05
Options exercised (unaudited).................. (137,000) 0.05
Options cancelled (unaudited).................. -- --
-------- -----
Balance at March 31, 1999 (unaudited)............ 255,000 $0.05
======== =====
</TABLE>
At March 31, 1999, there are 762,125 shares available for future grant under
the Plan.
The following table summarizes information about options outstanding and
exercisable as at March 31, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
WEIGHTED-
AVERAGE
REMAINING WEIGHTED- WEIGHTED-
CONTRACTUAL AVERAGE AVERAGE
EXERCISE NUMBER OF LIFE (IN EXERCISE NUMBER OF EXERCISE
PRICE SHARES YEARS) PRICE SHARES PRICE
- ---------------------- ------- ---- ----- ------- -----
$0.05 255,000 9.92 $0.05 255,000 $0.05
</TABLE>
The Company granted options for 674,926 shares of common stock under the
1999 Stock Option Plan to employees and certain non-employee consultants on
April 30, 1999. These options vest over a period of 3 years and are immediately
exercisable at $2.00 per share.
DEFERRED COMPENSATION
The Company has recorded deferred compensation charges of $0 and $1,468,067
for the year ended December 31, 1998 and for the three months ended March 31,
1999, respectively, for the difference between the exercise price and the deemed
fair value of certain stock options granted by the Company. These amounts are
being amortized by charges to operations, using the graded method, over the
vesting periods of the individual stock options, which range from immediately to
three years.
F-122
<PAGE>
MIGHTYMAIL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
4. STOCKHOLDERS' EQUITY (CONTINUED)
OPTIONS ISSUED TO CONSULTANTS
The Company granted options to purchase 55,000 shares of common stock to
consultants at exercise price of $0.05 per share on March 1, 1999. These options
were granted in exchange for consulting services performed. The Company valued
these options (using the Black-Scholes valuation method) at $325,450, for the
three months ended March 31, 1999. This amount was charged to operations in the
three months ended March 31, 1999.
PRO FORMA DISCLOSURE OF THE EFFECT OF STOCK-BASED COMPENSATION
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under FAS 123 requires the use of
option valuation models that were not developed for use in valuing employee
stock options. Pro forma information regarding net income (loss) and net income
(loss) per share is required by FAS 123. This information is required to be
determined as if the Company has accounted for its employee stock options under
the fair value method of FAS 123. Under this method, the estimated fair value of
the options is amortized to expense over the options' vesting period. The fair
value for these options was estimated at the date of grant using a Black-
Scholes option pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, 1999
----------------------
<S> <C> <C>
NON-QUALIFIED ISO
------- --------
Risk-free interest rate.............................. 5.50% 5.73%
Expected life of the option.......................... 5 years 10 years
Expected volatility.................................. 100% 100%
Expected dividend yield.............................. 0% 0%
</TABLE>
Because FAS 123 is applicable only to options granted since inception, its
adjusted effect will not be fully reflected until 2000.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions, including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimates, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
The weighted-average fair value of options granted to employees during the
three months ended March 31, 1999 was $0.04.
F-123
<PAGE>
MIGHTYMAIL NETWORKS, INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 IS UNAUDITED)
5. COMMITMENTS
The Company leases its facilities under noncancelable leases for varying
periods through May 1999. The following are the minimum lease obligations under
these leases at December 31, 1998:
<TABLE>
<CAPTION>
OPERATING
LEASES
---------
<S> <C>
1999........................................................ $12,500
Less current portion........................................ (12,500)
-------
Long-term portion........................................... $ --
=======
</TABLE>
Rent expense under operating lease arrangements for the years ended
December 31, 1997 and 1998 and the three months ended March 31, 1998 and 1999
totaled $82,740, $66,250, $21,306 and $8,583, respectively.
6. RELATED PARTY TRANSACTIONS
During the period from December 23, 1998 through March 31, 1999, the Company
issued stock subscriptions receivable to investors in exchange for shares of
preferred and common stock. These subscriptions receivable are due upon demand
and bear no interest. As of March 31, 1999, there were no outstanding amounts
due under subscriptions receivable.
7. YEAR 2000 (UNAUDITED)
The Year 2000 Issue is the result of computer programs being written using
two-digits rather than four to define the applicable year. Any of the Company's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This situation could result in
a system failure or miscalculations causing disruptions of operations,
including, among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
The Company believes that it will not be required to modify or replace any
portion of its software so that its computer system will function properly with
respect to dates in the year 2000 and thereafter.
F-124
<PAGE>
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
To the Shareholders of
LiquidMarket, Inc.
In our opinion, the accompanying balance sheet of LiquidMarket, Inc. (A
Company In The Developmental Stage) (the "Company") and the related statements
of operations, shareholders' equity and cash flows present fairly, in all
material respects, the financial position of the Company as of December 31,
1998, and the results of its operations and its cash flows for the period
June 12, 1998 (Date of Inception) through December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's negative cash flows from operations and
limited capital resources raise substantial doubt about its ability to continue
as a going concern. Management's plans in regard to these matters are also
addressed in Note 1. The financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
Woodland Hills, California
April 16, 1999, except for Note 8 as to which
the date is July 15, 1999
F-125
<PAGE>
LIQUIDMARKET, INC.
(A COMPANY IN THE DEVELOPMENTAL STAGE)
BALANCE SHEET
ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------- -----------
<S> <C> <C>
(UNAUDITED)
Current assets:
Cash and cash equivalents................................. $1,528,264 $ 598,800
Prepaid and other current assets.......................... 10,722 5,562
---------- -----------
Total current assets.................................... 1,538,986 604,362
Property and equipment, net................................. 305,424 328,444
---------- -----------
Total assets............................................ $1,844,410 $ 932,806
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY:
Current liabilities:
Accounts payable.......................................... $ 179,341 $ 113,493
Accrued liabilities and other............................. 30,407 90,295
---------- -----------
Total liabilities....................................... 209,748 203,788
---------- -----------
Commitments and contingencies (Note 5)
Shareholders' equity:
Series A Convertible Preferred Stock: $0.001 par value
(liquidation value $800,000); 3,200,000 shares
authorized, issued and outstanding...................... 3,200 3,200
Series B Convertible Preferred Stock: $0.001 par value
(liquidation value $1,500,000); 2,000,000 and 2,250,000
shares authorized, issued and outstanding at
December 31, 1998 and June 30, 1999 (unaudited)......... 2,000 2,250
Common stock: $0.001 par value; 15,000,000 shares
authorized; 3,600,000 shares issued and outstanding..... 3,600 3,600
Additional paid-in capital................................ 2,400,800 3,267,350
Unearned compensation..................................... (99,350) (185,294)
Accumulated deficit....................................... (675,588) (2,362,088)
---------- -----------
Total shareholders' equity.............................. 1,634,662 729,018
---------- -----------
Total liabilities and shareholders' equity.............. $1,844,410 $ 932,806
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-126
<PAGE>
LIQUIDMARKET, INC.
(A COMPANY IN THE DEVELOPMENTAL STAGE)
STATEMENT OF OPERATIONS
FOR THE PERIOD JUNE 12, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
JUNE 12, 1998
(DATE OF INCEPTION)
DECEMBER 31, JUNE 30, THROUGH
1998 1999 JUNE 30, 1999
------------- ----------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Costs and expenses:
Research and product development............... $ 267,529 $ 419,919 $ 687,448
Sales and marketing............................ 192,380 241,621 434,001
General and administrative..................... 211,750 441,446 653,196
Amortization of deferred compensation.......... 6,650 593,356 600,006
--------- ----------- -----------
Loss from operations......................... (678,309) (1,696,342) (2,374,651)
--------- ----------- -----------
Other income (expense):
Interest income................................ 3,521 10,642 14,163
--------- ----------- -----------
Loss before income tax provision............. (674,788) (1,685,700) (2,360,488)
Income tax provision............................. 800 800 1,600
--------- ----------- -----------
Net loss..................................... $(675,588) $(1,686,500) $(2,362,088)
========= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-127
<PAGE>
LIQUIDMARKET, INC.
(A COMPANY IN THE DEVELOPMENTAL STAGE)
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE PERIOD JUNE 12, 1998 (DATE OF INCEPTION) THROUGH JUNE 30, 1999
<TABLE>
<CAPTION>
SERIES A SERIES B
CONVERTIBLE CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK ADDITIONAL
-------------------- -------------------- -------------------- PAID-IN UNEARNED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION
--------- -------- --------- -------- --------- -------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at June 12, 1998
(Date of Inception)..... -- -- -- -- 3,600,000 $3,600 -- --
Sale of preferred stock
for cash.............. 3,200,000 $3,200 -- -- -- $ 796,800 --
Sale of preferred stock
for cash.............. -- -- 2,000,000 $2,000 -- -- 1,498,000 --
Unearned compensation
related to stock
options granted....... -- -- -- -- -- -- 106,000 $(106,000)
Compensation related to
stock options
granted............... -- -- -- -- -- -- -- 6,650
Net loss................ -- -- -- -- -- -- -- --
--------- ------ --------- ------ --------- ------ ---------- ---------
Balance at December 31,
1998.................... 3,200,000 $3,200 2,000,000 $2,000 3,600,000 $3,600 $2,400,800 $ (99,350)
========= ====== ========= ====== ========= ====== ========== =========
Sale of preferred stock
for cash.............. -- -- 250,000 $ 250 -- -- $ 187,250 --
Unearned compensation
related to stock
options granted....... -- -- -- -- -- -- 679,300 $(679,300)
Compensation related to
stock options
granted............... -- -- -- -- -- -- -- 593,356
Net loss................ -- -- -- -- -- -- -- --
--------- ------ --------- ------ --------- ------ ---------- ---------
Balance at June 30, 1999
(Unaudited)............. 3,200,000 $3,200 2,250,000 $2,250 3,600,000 $3,600 $3,267,350 $(185,294)
========= ====== ========= ====== ========= ====== ========== =========
<CAPTION>
TOTAL
ACCUMULATED SHAREHOLDERS'
DEFICIT EQUITY
------------- --------------
<S> <C> <C>
Balance at June 12, 1998
(Date of Inception)..... -- $ 3,600
Sale of preferred stock
for cash.............. -- 800,000
Sale of preferred stock
for cash.............. -- 1,500,000
Unearned compensation
related to stock
options granted....... -- --
Compensation related to
stock options
granted............... -- 6,650
Net loss................ $ (675,588) (675,588)
----------- -----------
Balance at December 31,
1998.................... $ (675,588) $ 1,634,662
=========== ===========
Sale of preferred stock
for cash.............. -- $ 187,500
Unearned compensation
related to stock
options granted....... -- --
Compensation related to
stock options
granted............... -- 593,356
Net loss................ $(1,686,500) $(1,686,500)
----------- -----------
Balance at June 30, 1999
(Unaudited)............. $(2,362,088) $ 729,018
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-128
<PAGE>
LIQUIDMARKET, INC.
(A COMPANY IN THE DEVELOPMENTAL STAGE)
STATEMENT OF CASH FLOWS
FOR THE PERIOD JUNE 12, 1998 (DATE OF INCEPTION) THROUGH DECEMBER 31, 1998 AND
FOR THE SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
JUNE 12, 1998
(DATE OF INCEPTION)
DECEMBER 31, JUNE 30, THROUGH
1998 1999 JUNE 30, 1999
------------- ----------- -------------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $ (675,588) $(1,686,500) (2,362,088)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 24,440 69,529 93,969
Amortization of deferred compensation........ 6,650 593,356 600,006
Changes in current assets and liabilities:
Prepaid and other current assets........... (10,722) 5,160 (5,562)
Accounts payable........................... 179,341 (65,848) 113,493
Accrued expenses........................... 30,407 59,888 90,295
---------- ----------- -----------
Net cash used in operating activities.... (445,472) (1,024,415) (1,469,887)
---------- ----------- -----------
Cash flows from investing activities:
Capital expenditures........................... (329,864) (92,549) (422,413)
---------- ----------- -----------
Net cash used in investing activities.... (329,864) (92,549) (422,413)
---------- ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of common stock......... 3,600 -- 3,600
Proceeds from issuance of Series A convertible
preferred stock.............................. 800,000 -- 800,000
Proceeds from issuance of Series B convertible
preferred stock.............................. 1,500,000 187,500 1,687,500
---------- ----------- -----------
Net cash provided by financing
activities............................. 2,303,600 187,500 2,491,100
---------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents............................ 1,528,264 (929,464) 598,800
Cash and cash equivalents at beginning of
period......................................... -- 1,528,264 --
---------- ----------- -----------
Cash and cash equivalents at end of period....... $1,528,264 $ 598,800 $ 598,800
========== =========== ===========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest..................................... -- -- --
Income taxes................................. $ 800 $ 800 $ 1,600
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-129
<PAGE>
LIQUIDMARKET, INC.
(A COMPANY IN THE DEVELOPMENTAL STAGE)
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT BUSINESS RISKS:
NATURE OF BUSINESS
LiquidMarket (the "Company") was incorporated in June 1998 in the State of
Delaware and is engaged in software development. As of December 31, 1998, the
Company is a development stage enterprise, as defined in Financial Accounting
Standards Board Statement No. 7. Since inception, the Company has devoted
substantially all of its efforts toward the development of its product and
establishing new business. The Company's business is extremely competitive and
is characterized by rapid technological change, new product development and a
competitive environment for the attraction and retention of knowledge workers.
The Company is an early stage enterprise and is subject to all the risks
associated with development stage companies.
SIGNIFICANT BUSINESS RISKS
Since its inception, the Company has incurred significant operating losses.
The ability of the Company to successfully carry out its business plan is
primarily dependent upon its ability to (1) obtain sufficient additional
capital, (2) overcome product development issues, and (3) generate significant
revenues and cash flows through the future sales of its primary product.
BASIS OF PRESENTATION
The Company's financial statements for the period June 12, 1998 (Date of
Inception) through December 31, 1998 have been prepared on a going-concern basis
which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. The Company had negative cash
flows from operations of ($445,472), and a net loss and an accumulated deficit
of ($675,588), as of December 31, 1998 and for the period June 12, 1998 (Date of
Inception) through December 31, 1998. The Company expects to incur additional
expenditures to complete and enhance its product. The Company's revenues from
product sales, and its working capital, may not be sufficient to fund its
working capital needs and meet its expansion objectives over the next twelve
months. Management recognizes that the Company may need to obtain additional
financing or consider reductions in its operating costs to enable it to continue
operations with available resources. Management's plans include raising funds
through the sale of additional equity securities, and expect that these efforts
will result in the additional capital needed to fund the Company's operations
and planned expansion. There can be no assurance that these funds will be
sufficient to adequately fund the operations and that the Company will achieve
profitability or positive cash flows.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
In the normal course of preparing financial statements in conformity with
generally accepted accounting principles, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
F-130
<PAGE>
LIQUIDMARKET, INC.
(A COMPANY IN THE DEVELOPMENTAL STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. Cash and cash
equivalents are carried at cost, which approximates fair value.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentration of credit risk, consist principally of cash and short-term
investments. The Company invests its excess cash in money market funds with
major financial institution. At times the Company's cash balances may be in
excess of the FDIC Insurance limits.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation and
amortization. Depreciation is computed using the straight-line method based upon
the estimated useful lives of the assets. Leasehold improvements are amortized
over the shorter of the estimated useful life or the life of the lease. Useful
lives are evaluated regularly by management in order to determine recoverability
in light of current technological conditions. Maintenance and repairs are
charged to expense as incurred while renewals and improvements are capitalized.
Upon the sale or retirement of property and equipment, the accounts are relieved
of the cost and the related accumulated depreciation or amortization, with any
resulting gain or loss included in the Statement of Operations.
SOFTWARE DEVELOPMENT COSTS
Under the provisions of Statement of Financial Accounting Standards ("SFAS")
No. 86, "Accounting for the Costs of Computer Software to Be Sold, Leased, or
Otherwise Marketed," the Company is required to capitalize software development
costs when "technological feasibility" of the product has been established and
anticipated future revenues ensure recovery of the capitalized amounts. As of
December 31, 1998, "technological feasibility" had not been reached and,
accordingly, no amount of software development costs have been capitalized.
Costs incurred in the research and development of products are expensed as
incurred.
INCOME TAXES
The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred tax liabilities and assets are determined based on
the difference between the financial statement and the tax bases of assets and
liabilities using enacted tax rates in effect for the period in which the
differences are expected to reverse. Valuation allowances are established, when
necessary, to reduce deferred tax assets to the amount expected to be realized.
F-131
<PAGE>
LIQUIDMARKET, INC.
(A COMPANY IN THE DEVELOPMENTAL STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
STOCK-BASED EMPLOYEE COMPENSATION
SFAS No. 123, "Accounting for the Awards of Stock-Based Compensation to
Employees," encourages, but does not require, companies to record compensation
costs for stock-based compensation plans at fair value. The Company has adopted
the disclosure requirements of SFAS No. 123, which involves pro forma disclosure
of net income under SFAS No. 123, detailed descriptions of plan terms and
assumptions used in valuing stock option grants. The Company has elected to
account for stock-based employee compensation awards in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25").
COMPREHENSIVE INCOME
Effective June 12, 1998 (Date of Inception the Company adopted the
provisions of SFAS No. 130, "Reporting Comprehensive Income." SFAS No. 130
establishes standards for reporting comprehensive income and its components in
financial statements. Comprehensive income, as defined, includes all changes in
equity (net assets) during a period from non-owner sources. To date, the Company
has not had any transactions that are required to be reported in comprehensive
income.
INTERIM FINANCIAL STATEMENTS
The accompanying unaudited financial amounts as of June 30, 1999 and the six
months then ended, include all adjustments (consisting of normal recurring
entries) which management believes are necessary for a fair presentation of the
financial position and results of operations for the interim period presented.
Certain information and footnotes disclosures normally included in financial
statements prepared in accordance with generally accounting principles have been
condensed or omitted in accordance with quarterly reporting guidelines.
3. PROPERTY AND EQUIPMENT, NET:
Property and equipment at December 31, 1998 and June 30, 1999 consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
USEFUL LIFE 1998 1999
----------- ------------- ---------
<S> <C> <C> <C>
(UNAUDITED)
Computer equipment and software.......................... 3 years $311,349 $402,090
Furniture and fixtures................................... 7 years 16,026 17,834
Leasehold improvements................................... 1 year 2,489 2,489
-------- --------
329,864 422,413
Less: Accumulated depreciation........................... 24,440 93,969
-------- --------
$305,424 $328,444
======== ========
</TABLE>
F-132
<PAGE>
LIQUIDMARKET, INC.
(A COMPANY IN THE DEVELOPMENTAL STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. INCOME TAXES:
The provision for income taxes represents the minimum state franchise taxes.
As of December 31, 1998, the Company has deferred income tax assets of
approximately $256,000, which has been offset by a 100% valuation allowance. The
deferred tax asset is primarily due to the Company's federal and state net
operating loss (NOL's) carryforwards available to offset future taxable income,
if any, of approximately $640,000 which begin to expire in 2013 and 2006 for
federal and state income tax purposes, respectively. However, the ultimate
realization of these NOL's is dependent on future taxable income of the Company,
subject to certain limitations, as defined under Section 382 of the Internal
Revenue Code.
As a result of the Company being in the development stage and the net loss
incurred during the period from June 12, 1998 (Date of Inception) through
December 31, 1998, management believes a valuation allowance for the entire
deferred tax asset, after considering deferred tax liabilities, is required.
5. COMMITMENTS AND CONTINGENCIES:
LEASES
The Company leases its facility under a noncancellable lease through 1999.
The following are the minimum lease payments under this lease:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
<S> <C>
Due in fiscal year:
1999...................................................... $41,288
-------
Minimum lease payments...................................... $41,288
=======
</TABLE>
Rent expense amounted to $22,478 and $30,966 for the period June 12, 1998
(Date of Inception) through December 31, 1998 and for the six months ended
June 30, 1999 (Unaudited), respectively.
SOFTWARE LICENSE
The Company licenses certain technology for use in its product. Pursuant to
the terms of the agreement, the Company is obligated to pay $55,000 during the
first two years of the term of the agreement. In addition, the Company may
exercise an option to purchase the software for $110,000. Payments previously
made by the Company will be deducted from the purchase price.
6. CAPITALIZATION:
CAPITAL
The authorized capital stock of the Company consists of 15,000,000 shares of
common stock, $.001 par value and 5,450,000 shares of preferred stock, $.001 par
value, of which 3,200,000 shares have been designated as Series A Stock, and
2,250,000 shares have been designated as Series B Stock.
F-133
<PAGE>
LIQUIDMARKET, INC.
(A COMPANY IN THE DEVELOPMENTAL STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. CAPITALIZATION: (CONTINUED)
CONVERTIBLE PREFERRED STOCK
Preferred stockholders may at any time elect to convert shares of preferred
stock into common stock. In addition, all outstanding shares of preferred stock
shall automatically be converted into shares of common stock if either (i) the
Company consummates an underwritten initial public offering with gross proceeds
of at least $15,000,000 or (ii) more than 80% of the outstanding shares of
preferred stock have been converted into common stock. Preferred stock shall
initially convert into common stock on a one-for-one basis. The conversion price
of the Series A and B preferred stock shall initially equal $0.25 and $0.75 per
share, respectively, subject to adjustment for stock splits.
The Series A and B preferred stock shall have a liquidation value (the
"Liquidation Value") equal to the per share original cost of $0.25 and $0.75,
respectively. Liquidation value will increase by the amount of any declared but
unpaid dividends on the preferred stock. Upon a liquidation, dissolution or
winding-up of the business of the Company, the holders of the preferred stock
shall be entitled to a preference in an amount equal to the greater of the (i)
Liquidation Value (subject to appropriate adjustment in the event of any stock
dividend, stock split, or the like), or (ii) such amount per share as would have
been payable had each share of preferred stock been converted into common stock
prior to such liquidation. A merger or consolidation of the Company in which the
Company is not the surviving entity, or the sale of all or substantially all of
the assets of the Company, shall be considered to be a liquidation, unless
otherwise elected by the holders of a majority of the outstanding shares of
preferred stock.
Each share of Series A and B preferred stock will be entitled to dividends
as declared by the Board of Directors but, in any event, at the same rate as the
common stock with declared dividends paid first to the holders of the Series B
preferred and Series A preferred, then to the holders of the common stock.
The Series A preferred stock will vote with the Series B preferred stock and
the common stock as a single class on all matters (on an as-converted basis).
7. STOCK OPTIONS (ALL INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 IS
UNAUDITED):
In October 1998, the Company adopted the 1998 stock incentive plan (the
"Plan") which provides for grants to employees and non-employees of incentive
stock options to purchase up to an aggregate of 2,200,000 shares of common
stock. The options vest 25% at the first-year anniversary from the date of grant
and 2.0833% on a monthly basis thereafter up to a period of 4 years. All options
generally expire after ten years.
For the period June 12, 1998 (Date of Inception) through December 31, 1998,
the Company granted options to purchase 530,000 shares of common stock at an
exercise price of $0.05 per share. The estimated fair value of common stock on
the dates of grant was $0.25 per share. No options were exercisable at December
31, 1998 and options to purchase 1,670,000 shares of common stock remain
available for future grants.
From January 1, 1999 through April 15, 1999, the Company granted options to
employees to purchase 165,000 shares of common stock at an exercise price of
$0.08 per share. The estimated
F-134
<PAGE>
LIQUIDMARKET, INC.
(A COMPANY IN THE DEVELOPMENTAL STAGE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS (ALL INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1999 IS
UNAUDITED): (CONTINUED)
fair value of the common stock on the dates of grant was $0.75 per share. In
addition, in May 1999, the Company entered into a consulting agreement with a
Board member to provide strategic consulting services in exchange for granting
options to purchase 325,000 shares of the Company's common stock at an exercise
price of $0.08 per share vesting in quarterly installments over a one year
period. In the event there is an Acquisition Event (as defined in the Plan)
these options become immediately exercisable in full prior to the Acquisition
Event. The estimated fair value of services to be provided approximates the
estimated fair value of the common stock on the date of grant of approximately
$1.83 per share. No options were exercisable at June 30, 1999 and options to
purchase 1,180,000 shares of common stock remain available for future grants.
The fair value of the options granted was estimated on the date of grant
using the minimum value method with the following assumptions: risk-free
rate--4.26%; expected option life--5 years; expected forfeitures rate--none;
expected dividend yield--none.
The Company uses the intrinsic value method of accounting for stock-based
compensation for employees prescribed by APB No. 25, and, accordingly, adopted
the disclosure-only provisions of SFAS No. 123. Had the Company applied the
provisions set forth in SFAS No. 123, the Company's net loss would not be
materially different from the amount presented for the period June 12, 1998
(Date of Inception) through December 31, 1998.
In connection with the stock option grants noted above, the Company
recognized unearned compensation of $185,294 which is being amortized over the
vesting period of the related options generally one to four years. The Company
recorded amortization of deferred compensation expense of $593,356 during the
six months ended June 30, 1999 relating to the stock options granted, of which
approximately $568,750 related to the options granted to the Board member noted
above (see Note 8).
8. SUBSEQUENT EVENT (UNAUDITED)
In July 1999, the Company entered into an agreement and plan of merger to
sell all the Company's outstanding preferred and common shares.
F-135
<PAGE>
XOOM.COM, INC.
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial information
for Xoom.com, Inc. gives effect to the mergers of Paralogic Corporation, Global
Bridges Technologies, Inc., Pagecount, Inc., Paralogic Software Corporation,
MightyMail Networks, Inc. and LiquidMarket, Inc. into Xoom.com, Inc. The
historical financial information has been derived from the respective historical
financial statements of Xoom.com, Inc., Paralogic Corporation, Global Bridges
Technologies, Inc., Pagecount, Inc., Paralogic Software Corporation, MightyMail
Networks, Inc., and LiquidMarket, Inc. and should be read in conjunction with
those financial statements and the related notes which were previously filed.
The MightyMail Networks, Inc., Paralogic Software Corporation and
LiquidMarket, Inc. acquisitions occurred on May 3, 1999, June 16, 1999, and
August 3, 1999, and therefore are already reflected in Xoom.com, Inc.'s
unaudited condensed consolidated balance sheet as of September 30, 1999 in the
Xoom.com, Inc. Form 10-Q. As a result, a Xoom.com, Inc. unaudited pro forma
condensed combined balance sheet as of September 30, 1999 is not needed.
The unaudited pro forma condensed combined statement of operations for the
year ended December 31, 1998, combines historical statements of operations for
Xoom.com, Inc., Paralogic Corporation, Global Bridges Technologies, Inc.,
Pagecount, Inc., Paralogic Software Corporation, MightyMail Networks, Inc. and
LiquidMarket, Inc. and gives effect to the mergers, including the amortization
of goodwill and other intangible assets, as if they had occurred on January 1,
1998. The unaudited pro forma condensed combined statement of operations for the
nine months ended September 30, 1999, combines historical statements of
operations for Xoom.com, Inc., Paralogic Software Corporation, MightyMail
Networks, Inc. and LiquidMarket, Inc., and gives effect to the mergers,
including amortization of goodwill and other intangible assets, as if they had
occurred on January 1, 1999.
The unaudited pro forma condensed combined information is presented for
illustrative purposes only and is not necessarily indicative of the operating
results or financial position that would have occurred if the transactions had
been consummated at the dates indicated, nor is it necessarily indicative of
future operating results or financial position of the combined companies.
F-136
<PAGE>
XOOM.COM, INC.
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------------------------------------------------------
PARALOGIC
CORPORATION
FOR THE GLOBAL
PERIOD BRIDGES
JANUARY 1, TECHNOLOGIES PAGECOUNT, INC.
1998 FOR THE PERIOD FOR THE PERIOD
THROUGH JANUARY 1, JANUARY 1, PARALOGIC
FEBRUARY 1998 THROUGH 1998 THROUGH MIGHTYMAIL SOFTWARE
XOOM.COM 28, 1998 MAY 31, 1998 JUNE 30, 1998 NETWORKS, INC. CORPORATION
----------- ------------ -------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue....................... $ 4,865 $80 $ -- $208 $ 355 $165
Cost of net revenue............... 2,000 31 -- 14 215 3
------- --- ---- ---- ------ ----
Gross margin...................... 2,865 49 -- 194 140 162
Operating expenses:
Operating and development....... 2,558 12 11 -- 47 --
Sales and marketing............. 1,570 2 -- 2 43 12
General and administrative...... 2,158 13 4 184 222 97
Purchased in-process research
and development............... 790 -- -- -- -- --
Amortization of deferred
compensation.................. 1,111 -- -- -- -- 137
Amortization of goodwill and
other intangible assets....... 1,087 -- -- -- -- --
------- --- ---- ---- ------ ----
Total operating expenses.......... 9,274 27 15 186 312 246
------- --- ---- ---- ------ ----
Income (loss) from operations..... (6,409) 22 (15) 8 (172) (84)
Other income (expense):
Interest income................. 37 -- -- 1 -- --
Interest expense................ (20) -- -- (2) 4 (1)
Interest expense related to
warrant....................... -- -- -- -- -- --
------- --- ---- ---- ------ ----
Net income (loss)................. $(6,392) 22 $(15) $ 7 $ (168) $(85)
======= === ==== ==== ====== ====
Basic and diluted net loss per
share...........................
Shares used in per share
calculation--basic and
diluted.......................
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
---------------------------------------------------
PRO FORMA
LIQUID- BUSINESS
MARKET, COMBINATION
INC. COMBINED ADJUSTMENTS PRO FORMA
-------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Net revenue....................... $ -- $ 5,673 $ -- $ 5,673
Cost of net revenue............... -- 2,263 -- 2,263
----- -------- -------- --------
Gross margin...................... -- 3,410 -- 3,410
Operating expenses:
Operating and development....... 67 2,695 -- 2,695
Sales and marketing............. 51 1,680 -- 1,680
General and administrative...... 104 2,782 -- 2,782
Purchased in-process research
and development............... -- 790 (460)(A) 330
Amortization of deferred
compensation.................. -- 1,248 -- 1,248
Amortization of goodwill and
other intangible assets....... -- 1,087 19,625 (B) 20,712
----- -------- -------- --------
Total operating expenses.......... 222 10,282 19,165 29,447
----- -------- -------- --------
Income (loss) from operations..... (222) (6,872) (19,165) (26,037)
Other income (expense):
Interest income................. 1 39 -- 39
Interest expense................ -- (19) -- (19)
Interest expense related to
warrant....................... -- -- -- --
----- -------- -------- --------
Net income (loss)................. $(221) $ (6,852) $(19,165) $(26,017)
===== ======== ======== ========
Basic and diluted net loss per
share........................... (C) $ (2.86)
========
Shares used in per share
calculation--basic and
diluted....................... (C) 9,092
========
</TABLE>
F-137
<PAGE>
XOOM.COM, INC.
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------------------------------
PARALOGIC
CORPORATION
FOR THE GLOBAL
PERIOD BRIDGES
JANUARY 1, TECHNOLOGIES PAGECOUNT, INC.
1998 FOR THE PERIOD FOR THE PERIOD
THROUGH JANUARY 1, JANUARY 1, PARALOGIC
FEBRUARY 1998 THROUGH 1998 THROUGH MIGHTYMAIL SOFTWARE
XOOM.COM 28, 1998 MAY 31, 1998 JUNE 30, 1998 NETWORKS, INC. CORPORATION
----------- ------------ -------------- --------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Net revenue....................... $ 8,318 $80 $ -- $208 $ 355 $ 239
Cost of net revenue............... 3,584 31 -- 14 215 13
-------- --- ---- ---- ------ -----
Gross margin...................... 4,734 49 -- 194 140 226
Operating expenses:
Operating and development....... 3,841 12 11 -- 62 145
Sales and marketing............. 2,834 2 -- 2 57 73
General and administrative...... 3,366 13 4 184 297 35
Purchased in-process research
and development............... 790 -- -- -- -- --
Amortization of deferred
compensation.................. 1,416 -- -- -- -- 182
Amortization of goodwill and
other intangible assets....... 1,843 -- -- -- -- --
-------- --- ---- ---- ------ -----
Total operating expenses.......... 14,090 27 15 186 416 435
-------- --- ---- ---- ------ -----
Income (loss) from operations..... (9,356) 22 (15) 8 (276) (209)
Other income (expense):
Interest income................. 187 -- -- 1 1 --
Interest expense................ (135) -- -- (2) (6) (1)
Interest expense related to
warrant....................... (1,494) -- -- -- -- --
-------- --- ---- ---- ------ -----
Net income (loss)................. $(10,798) 22 $(15) $ 7 $ (281) $(210)
======== === ==== ==== ====== =====
Basic and diluted net loss per
share...........................
Shares used in per share
calculation--basic and
diluted.......................
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------
PRO FORMA
LIQUID- BUSINESS
MARKET, COMBINATION
INC. COMBINED ADJUSTMENTS PRO FORMA
-------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Net revenue....................... $ -- $ 9,200 $ -- $ 9,200
Cost of net revenue............... -- 3,857 -- 3,857
----- -------- -------- --------
Gross margin...................... -- 5,343 -- 5,343
Operating expenses:
Operating and development....... 268 4,339 -- 4,339
Sales and marketing............. 192 3,160 -- 3,160
General and administrative...... 211 4,110 -- 4,110
Purchased in-process research
and development............... -- 790 (460)(A) 330
Amortization of deferred
compensation.................. 7 1,605 -- 1,605
Amortization of goodwill and
other intangible assets....... -- 1,843 25,777 (B) 27,620
----- -------- -------- --------
Total operating expenses.......... 678 15,847 25,317 41,164
----- -------- -------- --------
Income (loss) from operations..... (678) (10,504) (25,317) (35,821)
Other income (expense):
Interest income................. 3 192 -- 192
Interest expense................ (1) (145) -- (145)
Interest expense related to
warrant....................... -- (1,494) -- (1,494)
----- -------- -------- --------
Net income (loss)................. $(676) $(11,951) $(25,317) $(37,268)
===== ======== ======== ========
Basic and diluted net loss per
share........................... (C) $ (3.80)
========
Shares used in per share
calculation--basic and
diluted....................... (C) 9,799
========
</TABLE>
F-138
<PAGE>
XOOM.COM, INC.
UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
--------------------------------------------------
PARALOGIC
MIGHTYMAIL SOFTWARE
XOOM.COM FOR NETWORKS, INC. CORPORATION FOR
THE NINE FOR THE PERIOD THE PERIOD
MONTHS ENDED JANUARY 1, JANUARY 1, 1999
SEPTEMBER 30, 1999 THROUGH THROUGH
1999 MAY 3, 1999 JUNE 16, 1999
-------------- -------------- ----------------
<S> <C> <C> <C>
Net revenue..................................... $ 19,903 $ -- $ 291
Cost of net revenue............................. 7,645 -- 12
-------- ------- -------
Gross margin.................................... 12,258 -- 279
Operating expenses:
Operating and development..................... 5,708 634 319
Sales and marketing........................... 13,507 24 160
General and administrative.................... 6,846 296 79
Purchased in-process research and
development................................. 2,603 -- --
Amortization of deferred compensation......... 495 1,283 962
Amortization of goodwill and other intangible
assets...................................... 7,836 -- --
-------- ------- -------
Total operating expenses........................ 36,995 2,237 1,520
-------- ------- -------
Loss from operations............................ (24,737) (2,237) (1,241)
Other income (expense):
Interest income............................... 6,213 1 2
Interest expense.............................. (90) (2) --
-------- ------- -------
Net loss........................................ $(18,614) $(2,238) $(1,239)
======== ======= =======
Basic and diluted net loss per share............
Shares used in per share calculation--basic and
diluted.......................................
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------------
LIQUID-
MARKET,
INC. FOR
THE PERIOD
JANUARY 1,
1999 PRO FORMA
THROUGH BUSINESS
AUGUST 3, COMBINATION
1999 COMBINED ADJUSTMENTS PRO FORMA
----------- ---------- ------------- -----------
<S> <C> <C> <C> <C>
Net revenue..................................... $ -- $ 20,194 $ -- $ 20,194
Cost of net revenue............................. -- 7,657 -- 7,657
------- -------- -------- --------
Gross margin.................................... -- 12,537 -- 12,537
Operating expenses:
Operating and development..................... 519 7,180 -- 7,180
Sales and marketing........................... 269 13,960 -- 13,960
General and administrative.................... 506 7,727 -- 7,727
Purchased in-process research and
development................................. -- 2,603 (2,603)(A) --
Amortization of deferred compensation......... 701 3,441 -- 3,441
Amortization of goodwill and other intangible
assets...................................... -- 7,836 13,664 (B) 21,500
------- -------- -------- --------
Total operating expenses........................ 1,995 42,747 11,061 53,808
------- -------- -------- --------
Loss from operations............................ (1,995) (30,210) (11,061) (41,271)
Other income (expense):
Interest income............................... 12 6,228 -- 6,228
Interest expense.............................. (1) (93) -- (93)
------- -------- -------- --------
Net loss........................................ $(1,984) $(24,075) $(11,061) $(35,136)
======= ======== ======== ========
Basic and diluted net loss per share............ (C) $ (2.09)
========
Shares used in per share calculation--basic and
diluted....................................... (C) 16,780
========
</TABLE>
F-139
<PAGE>
XOOM.COM, INC.
NOTES TO THE UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
The adjustments to the unaudited pro forma condensed combined statement of
operations for the year ended December 31, 1998 and the nine months ended
September 30, 1999, have been calculated assuming that the mergers occurred as
of January 1, 1998 and January 1, 1999, respectively and are as follows:
(A) The purchased in-process research and development charges of $1,082,000 and
$1,521,000 related to the MightyMail Networks, Inc. and Paralogic Software
Corporation acquisitions, respectively, have been excluded from the net
loss for the year ended December 31, 1998 and the nine months ended
September 30, 1999, as they represent non-recurring charges. Additionally,
purchased in-process research and development charges of $330,000 and
$130,000 related to the Paralogic Corporation and Pagecount, Inc.
acquisitions, respectively, have been excluded from the net loss for the
year ended December 31, 1998. No purchased in-process research and
development charges were incurred in connection with the
LiquidMarket, Inc. merger.
(B) To reflect the amortization of goodwill and other intangible assets
resulting from the MightyMail Networks, Inc., Paralogic Software
Corporation, and LiquidMarket, Inc. acquisitions. During the year ended
December 31, 1998, this amount also reflects the amortization of goodwill
and other intangible assets resulting from the Paralogic Corporation,
Global Bridges Technologies, Inc. and Pagecount, Inc. acquisitions. The
goodwill and other intangible assets are being amortized over periods of
twenty-four to forty-eight months.
(C) Basic and diluted net loss per share reflects the issuance of 682,410,
200,731, 335,947, 654,018 and 930,426 shares of Xoom.com's common stock
related to the Paralogic Corporation, Global Bridges Technologies, Inc.,
MightyMail Networks, Inc., Paralogic Software Corporation and LiquidMarket,
Inc. acquisitions, respectively, as if the shares had been outstanding for
the entire period. The effect of stock options assumed in the merger has
not been included as their inclusion would be anti-dilutive. The shares
issued to the shareholders of MightyMail Networks, Inc., and LiquidMarket,
Inc. include 33,593 and 106,101 shares, respectively, held in escrow which
will be released upon the achievement of specific performance obligations.
F-140
<PAGE>
[inside back cover]
Graphic with NBCi logo in the center of a swirl superimposed on a full-page
faded background consisting of computer-screen views from various NBCi
properties; below the NBCi logo on the left, the Xoom.com logo next to a
computer-screen view of the Xoom.com homepage; below the NBCi logo on the right,
the Snap logo next to a computer-screen view of the Snap homepage; below the
Snap logo and computer-screen view, the NBCi logo below a computer-screen view
of the NBCi homepage.
<PAGE>
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No dealer, salesperson or other person is authorized to give any information
or to represent anything not contained in this prospectus. You must not rely on
any unauthorized information or representations. This prospectus is an offer to
sell only the shares offered hereby, but only under circumstances and in
jurisdictions where it is lawful to do so. The information contained in this
prospectus is current only as of its date.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----------
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 11
Special Note Regarding Forward-Looking
Statements.................................... 30
Use of Proceeds................................ 31
Dividend Policy................................ 31
Price Range of Class A Common Stock............ 31
Capitalization................................. 32
Dilution....................................... 34
NBCi Unaudited Selected Pro Forma Condensed
Combined Financial Data....................... 36
NBC Internet, Inc.'s Management's Discussion
and Analysis of Pro Forma Financial Condition
and Results of Operations..................... 38
Xoom.com Selected Consolidated Financial
Data.......................................... 52
Xoom.com's Management's Discussion and Analysis
of Financial Condition and Results of
Operations.................................... 53
Business....................................... 73
Management..................................... 94
Related Party Transactions..................... 104
Principal and Selling Stockholders............. 107
TRACES Stockholder............................. 108
Description of Capital Stock................... 109
Shares Eligible for Future Sale................ 118
Underwriting................................... 120
Legal Matters.................................. 122
Experts........................................ 122
Available Information.......................... 122
Index to Consolidated Financial Statements..... F-1
</TABLE>
----------------
4,600,000 Shares
NBC INTERNET, INC.
Class A Common Stock
------------
[LOGO]
------------
GOLDMAN, SACHS & CO.
BEAR, STEARNS & CO. INC.
CHASE H & Q
DEUTSCHE BANC ALEX. BROWN
ROBERTSON STEPHENS
ALLEN & COMPANY INCORPORATED
BANC OF AMERICA SECURITIES LLC
GRUNTAL & CO., L.L.C.
SALOMON SMITH BARNEY
Representatives of the Underwriters
- --------------------------------------------------------------------------------
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